How Small Businesses Plan to Prepare for a Recession

Last Updated April 3, 2023

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As the U.S. economy falters and the specter of a possible recession looms large, small business owners may want to prepare for such an event before it hits to reduce the impact of a potential financial slowdown.

As Americans prepare for a possible economic downturn, altLINE compiled five strategies from news coverage and industry sources to help small businesses prepare for a recession, which is a period of economic decline that lasts more than a few months.

Various factors—including high interest rates, a decrease in consumer spending, asset bubbles, and deflation—can cause recessions. During these periods of economic decline, businesses may close, unemployment often rises, and consumer spending tends to decrease. Typically, government economic efforts during a recession seek to stabilize the economy and protect jobs.

By preparing for a recession before it hits, small business owners can increase the likelihood of their businesses surviving and thriving during an economic downturn. They can do so by taking these steps, even during difficult economic times.

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Seeking alternative revenue

Creating multiple revenue streams is one of the top ways small businesses can prepare for a looming recession. Diversifying and expanding ways of producing revenue ensures a company’s success is not tied to one client or product.

Related: Small Business Revenue Statistics

Owners can consider expanding product or service offerings or expanding the business digitally to reach more people than just in the local region. Podcasts and e-books can present the unique skill sets and knowledge of a business in new ways that generate additional income. Keeping an open source of funds such as a line of credit or an invoice factoring facility are other strategies business owners can implement to help with cash flow shortages or unexpected expenses.

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Saving when possible

Small business owners should keep several months’ worth of operating expenses in a savings account or emergency fund. Putting money aside when business is good is one of the easiest ways to build savings. Setting up automatic monthly transfers into a separate savings account is another way to grow the emergency fund.

Business owners should keep a close accounting of incoming and outgoing money and cut costs when possible. Paying off debt that carries high interest rates and strict repayment terms can save a lot of money in the long run. It allows small businesses to focus on collecting payments promptly and reducing outstanding debts to improve cash flow and increase financial stability. They can also look for ways to reduce operational costs such as renegotiating leases or supplier contracts to improve profitability and lower ongoing expenses.

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Remaining adaptable

By remaining adaptable and open to pivoting and change, a business can increase its chances of success during a recession and better navigate an economic downturn.

Companies should avoid overcommitting to advance product orders. Ordering products too far in advance can limit a business’s ability to pivot. By ordering smaller quantities, a company can remain more flexible and better respond to changes in the market. However, there is a balance to be struck between protecting this type of flexibility and ensuring a stable supply chain for frequently used products.

Small businesses can consider shifting to different business plans and strategies that may perform better during a recession—for example, switching to products that are in higher demand, entering new markets, or changing the business model altogether. They can make good choices by staying informed about changes in consumer behavior, shifts in the competitive landscape, and new regulations.

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Moving online—sometimes entirely

Moving a company online is one strategy to prepare for a potential recession, as it offers several benefits that can help a business weather an economic downturn. Operating a business online can reduce overhead costs associated with physical storefronts, such as rent and utilities, helping to improve profitability during a recession.

Establishing an online presence allows customers to interact with a business 24/7, increasing convenience and accessibility and helping to maintain revenue during a recession. An online business can also be scaled more quickly and cost-effectively than a physical business, allowing for growth and expansion with lower costs. Owners conducting business online can operate from anywhere with an internet connection, allowing for increased flexibility and freedom in running a business, even during a recession.

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Creating employee communication plans

Companies should create an effective employee communication plan to maintain transparency and keep employees informed before a recession. Employers can prepare by determining which employees and departments are most affected by changes during a recession and prioritizing communication with them.

There are various ways to communicate with employees, including email, Slack, in-person meetings, or virtual company-wide meetings. The particular method utilized is not as important as establishing a clear company message consistent across all communication channels and keeping a regular communication schedule to ensure employees are informed and up-to-date.

Businesses that encourage employees to provide feedback and ask questions can increase transparency and foster a sense of engagement and trust. This can work effectively if there is a team or individual responsible for managing employee communication, ensuring that messages in both directions are delivered consistently and promptly.

Written by: Aubrey Jane McClaine