How to Prepare Your Business for an Economic Slowdown
Financial winter is coming. Or is it? Despite renewed optimism that the US economy can avoid a deep downturn, economists say the chances of a recession in 2024 are still about even. Small businesses are feeling the pain from high inflation, declining consumer confidence, and other economic headwinds. Whether we officially enter a recession in the next 12 months remains to be seen. But businesses should not wait for a formal determination to take action to protect themselves against the current economic stressors. Taking proactive steps can help your business thrive even in tough economic times.
State of the Economy
In July 2023, the US economy shrank by 0.9 percent, its second consecutive quarter of negative growth. Traditionally—but not technically—this would qualify as a recession. The National Bureau of Economic Research (NBER) helps determine when the US economy is in a recession, but to date, it has not made that finding.
A National Federation of Independent Business (NFIB) survey indicates that small businesses were more optimistic in December 2023 than in November 2023 and feel that there will be better business conditions in the next six months; however, they remain generally pessimistic about future business conditions.[1] Small businesses’ sales growth has slowed, their bottom line is being squeezed, and there are few options for financial relief other than increasing prices, according to the NFIB’s December 2023 report.[2] The following are some key findings in the survey report:
Inflation and labor quality are the top concerns for small businesses.
Nearly half of businesses report job openings that are hard to fill.
Only 23% of the businesses surveyed plan to increase compensation, while 29% are increasing average selling prices.
The net percentage of business owners reporting higher nominal sales in the last three months increased by 6%, but those expecting real sales to be higher during the next three months increased by 4%.
Ways to Prepare for an Economic Slowdown
While there is no consensus about whether the United States is likely to enter a recession, it is clear that the economy has slowed down over the past few years, prices are rising at the fastest rate in decades, and Americans are scaling back on spending.
In addition to hoping for the best, businesses should take concrete actions to prepare for an economic downturn. Businesses can use the following strategies to remain on their toes as they head into what could be a make-or-break financial year.
Balance your budget. Poor cash flow management is among the top reasons for business failure. Tough economic times can magnify cash flow problems due to higher expenses and lower revenue. Routine revenue projections can help you ensure that your business is generating enough cash to cover day-to-day expenses until a better tomorrow comes.
Build up cash reserves. Having some savings in the bank to survive an economic winter could be the difference between staying open and shutting down. That might mean holding on to profits rather than reinvesting them in the business or paying them out in dividends. Avoid making expenditures that are not absolutely necessary and consider taking out a loan when interest rates are lower. Currently, US small businesses are paying more for loans than they have in 16 years as a result of higher borrowing costs.[3]
Revisit your collections process. Falling behind on client invoicing can lead to late payments that hurt your cash flow. If you do not already have a system for tracking and managing invoices, now is a good time to establish one. Consistency is key during economic uncertainty. Especially if you have recently lost clients or customers, you need to ensure that your remaining clients are paying on time.
Lower costs. Cash in is just half of the cash flow equation. Cash out is equally important. Aside from squirreling away profits and putting off capital expenditures, look for ways to trim the fat from your operations, such as renegotiating long-term vendor contracts and cutting unprofitable products and services. Small spending reductions can add up to big savings. Data-driven insights can help identify areas where you can maximize efficiencies.
Market smarter, not harder. A simple way to alleviate cash-flow concerns is to maintain sales. This is easier said than done at a time of falling consumer spending. Targeted marketing campaigns on social media may provide a better bang for the buck. Email marketing, content marketing, cross-selling, and upselling are other cost-efficient ways to reach customers.
Protect your personal assets. You can protect your personal assets from business creditors by forming a limited liability company (LLC). Because an LLC also shields a business owner’s personal assets from lawsuits against the business, it is advisable in any economy, boom or bust.
Are You Prepared for (Financial) Winter?
Taking steps to prepare for hard economic times is crucial. Our business planning attorneys can help you take legal steps to protect you and your business, such as forming an LLC or renegotiating contracts with vendors. Call or contact us today to schedule a meeting.
[1] Small Business Optimism Index December 2023 Report: Inflation Returns as Top Business Problem on Main Street, NFIB, https://www.nfib.com/surveys/small-business-economic-trends/ (last visited Jan. 24, 2024). The NFIB Research Foundation has collected small business economic trends data with quarterly surveys since the fourth quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month.
[2] Id.
[3] Safiyah Riddle, US Small Business Lending Holding Up Despite Higher Cost of Credit, Reuters (July 13, 2023), https://www.reuters.com/markets/us/us-small-business-lending-holding-up-despite-higher-cost-credit-2023-07-13.