October 12, 2022
A recession can be a scary prospect for a business of any size. If your business is a fledgling startup, it is especially crucial to protect your small business from cold financial winds. Fortifying your business to survive a recession is essential at any phase in your business’ lifecycle. Starting your business’ life with the extra challenge of a recession can be a way to set your business up for success for years to come.
So, what happens in a recession? The most common definition of a recession is two or more financial quarters in which GDP remains stagnant or shrinks. Other markers of a recession could be increased unemployment, a significant decrease in real income due to inflation, or changed consumer buying patterns due to the former two factors. Businesses that thrive in the recession have learned to play to these changes in human behaviour.
Building a recession-proof business will depend on your industry, but the key principles remain the same. There are certain industries that are more resilient in a recession, generally known as recession-proof industries. No matter how bad the economy gets, consumers still need essentials such as food, basic clothing, and utilities. Businesses that thrive in a recession are often ones that provide essentials. Other products in demand during a recession may be vice products or services, such as liquor or gambling. Sadly, the uncertainty or fear that can come with layoffs, lost housing, or a reduced standard of living in a recession can drive people to consume more of these vices than they otherwise might.
Other industries that provide low-priced alternatives to a standard, such as dollar-store merchandise, may see an increase in business as people try to stretch their dollars as far as possible. For these industries, a recession can actually be good! Is a recession good or bad? It all depends on the opportunities you see in it.
Changing trends in human behaviour are the foundation of economics, and finding the buying trend that benefits your business is the key to becoming a business that thrives in a recession. While there are certain products in demand during a recession, there is no one product that will make or break your business in a recession. The key is to find the behaviours and strategies that will recession-proof your business, and stick to those key principles. With that, let’s look at some of the most important things you can do to recession-proof your startup.
In a recession, it is unwise to rely on a single stream of income that could dry up at a turn of the market. Be creative with your business’ focus. Is there a digital product you could sell as an add-on to a physical product; for instance, a download of an audiobook alongside a physical book. Could you add a product? To continue the book example, if you sell a children’s book in your Amazon storefront, you could find or create a craft kit or how-to guide that complements the book and market it alongside the story.
Cash flow is always critical to the health of your business, especially so in a recession. The difference between businesses that thrive in recession and those that fail is often cash management practices. Follow your cash flow through the entire order-to-cash process to find any weaknesses where your cash may be getting stuck. Once you have your cash flow process optimized, you will be also able to make a cash flow forecast for the next month and the next quarter.
Once you know your exact cash state, you can have an exact idea of how to structure your monthly working budget. And once you have that budget, stick to it closely. While this is a good business practice, in any case, it becomes especially important when one bad quarter of cash shortfalls could make the difference between life and death in your business. Sticking to a budget will also allow you to set aside a cash buffer in case of a bad month or quarter.
You must also consider the possibility that no business owner wishes to consider: asset liquidity in case of emergency. Keeping a close eye on your current ratio – the ratio of your current, or most liquid, assets to your current liabilities – to ensure that you maintain a healthy ratio. This would mean that you would be able to meet all your current liabilities for a month, or a quarter, by liquidating assets, without any revenue at all. Though this is a highly unpleasant situation to consider, it could mean the difference between survival and failure.
It is also wise to consider your financing options before an emergency situation arises. Is your business healthy enough to open a new line of credit? Do you have investors who can infuse extra cash into your business? Knowing all your options ahead of time will give you some peace of mind, whether these options are open to you or not.
You may not intend to sell your business, especially if it is your special brainchild, but to have your business ready to sell means that it is as healthy as possible. A business that is ready to sell has good cash flow, all necessary operating procedures set in place, and a well-organized chain of command. In the event of selling the business, these things would mean that the company was ready to sell and pass on to another owner without skipping a beat. Even if you do not intend to sell your business, making your business sale-ready means that you as the owner will be able to free up your time for high-level strategy and future planning instead of day-to-day operations.
In the modern world, recessions can strike without warning. The recession caused by Covid was an example of a recession with no previous economic signals. The businesses that survived the Covid recession were those who were ready to pivot to a new product, service, or entirely new business model with little to no notice. Flexibility, creativity, and acute powers of observation of human behaviour are the hallmarks of survival in a recession.
What does your organization really need in terms of risk tolerance? Are you a wildcat who is not afraid of failing spectacularly, then rising again from the ashes? Or do you have investors who need to see a return, employees who need to be paid, and a family to support? Most small business owners or startup entrepreneurs fall somewhere along this risk spectrum. Assessing your true risk tolerance levels is key to understanding where your business would really stand during a recession. It also helps you strategize better when it comes to the decisions you need to make as a business owner.
The ultimate key to recession-proofing your business is planning. If you have your business objectives laid out ahead of time, you will be able to achieve them more efficiently no matter how the recession affects your business. Whether it is cash flow planning, operational planning, or emergency planning, having these goals laid out is the key to clarifying your business strategies, first for yourself, and then for others in your organization. Having your startup’s ultimate goals is also key to flexibility. Concrete plans may have to be scrapped if the economy takes a sudden turn, but overarching goals are still reachable even under completely different circumstances. Stay flexible and creative, and maintain clarity – and your business will have the best chance of succeeding under any circumstances.
Accountero helps startups and growth-focused businesses with their finances. Accountero is a ‘built for founders’ financial platform that offers digital bookkeeping on a free tech-stack, high-level reports for business owners, forecasting tools and on-demand access to professionals like fractional CFOs, tax advisors, funding experts and more, who can help with tax planning. Talk to us today so we can help you to stay focused on your business growth, while our experts manage the finances.