How to recession-proof your small business

April 22, 2020
5 minutes read

Normally, small businesses generate 65% of all new jobs and without them, the economy does not grow. But now, they are facing unprecedented hardships.

Not since 2008 has the world faced a recession quite like this one, due to coronavirus (COVID-19). The US Chamber of Commerce reports 1 in 4 businesses have already temporarily shut down, and that 43% have less than 6 months until shutting down.

But there is hope. If you are a small business owner who feels overwhelmed by recent events, we want you to know that there is support there for you. It is hard to plan for something like this - it is not your fault.

Whether you are facing a lack of customers, a struggle for supplies, or trying to cut costs, this guide is for you. We've assembled tips and best practices to help you weather the storm, and give you a better chance to come out on the other side.

1. Managing your finances

During a recession, you never want to lose sight of your bottom line. It's important that you have a proper system in place so that you know whether you are ultimately making or losing money.

Often, a good number to track is monthly revenue. You'll want to make sure that your revenue (plus your cash in the bank) minus your expenses this month, is enough to pay your projected expenses for next month.

Measure cash

The three most important parts to think about when measuring cash flow are:

  1. Expense tracking - an expense tracking system can give you a clear understanding of how much you are spending this month, and how much you plan to spend next month (or the full quarter). In times of a recession, it might be helpful to consider eliminating any unnecessary expenses or subscriptions.
  2. Profit and loss (P&L) - a profit and loss statement shows you how much you've made or lost in a quarter or in a year.
  3. Balance sheet - this will show you your overall assets versus liabilities, for example pieces of equipment that you own, or loans/debts that you owe.

To make this tracking easier, you might want to consider using accounting software that can calculate your cash flow and monitor your expenses.

Get paid

If cash flow is looking like a problem, then start with the easiest route: customers who already owe you money. An easy way to take action is to produce a customer statement, a quick email to your customer with all unpaid invoices listed and the total amount due. That way, you can get more cash in the door. Be sure to follow up with clients regularly and handle any disputes professionally.

If you're still accepting payments via cash and cheque, now may be the time to switch over to digital. If you're already using account software like Wave, you can start using digital payments right away. Just create an invoice in Wave and then turn on online payments.

Alternative financing and credit

One of the best rules of running a business is to ensure you've got enough capital to weather tough periods. If you already have some loans, that's good, but there are a number of other options available for you to last a recession.

Here are some key financing strategies:

  1. Contact your lenders - see if you can negotiate better terms for your existing loans. A number of banks, for example, are offering payment deferrals on loans and mortgages, including commercial ones. Contact your bank representative. And there are even many stories of independent landlords offering leniency on residential and commercial payments. See what options are available to you.
  2. Contact your suppliers - you may be able to get credit from your suppliers. If you have a regular relationship with a good supplier, you can ask for credit terms, which would be 30-60 days of time to pay for the goods that you order. This can help with cash flow.
  3. Access government relief and loans - you can often receive aid from the government in a time of crisis. For COVID relief, please access this link if you are in the United States and this if you are a Canadian business.
  4. Apply for bank new loans or credit lines - as long as you have 2-3 years of financial history, you should be able to apply for a new line of credit or a loan. Contact your bank representative to see what's available to you.
  5. Invoice factoring - this is a process that allows you to finance invoices (aka get paid faster) from slow-paying but creditworthy clients, for a small fee or percentage of the contract. If you are interested, you can look into a service like BlueVine.
  6. Keep your personal credit in good shape - it can be tempting to just prop up your business or make fast payments on your personal cards. But instead, invest in a business credit card. Sometimes they can be offered at no cost with your business account. That way, you can avoid hurting your personal credit score if you can't make payments, not to mention keep your finances cleaner.
  7. Crowdfunding - another option, more of a last resort, might be to start a GoFundMe to raise extra funds from local community members, customers, friends, and family.

2. Cutting costs and inventory management

If you don't have enough cash flow, you might need to make fast cuts to the business, including layoffs or selling off unnecessary inventory.

Inventory

First, if you sell goods, explore what you can do to reduce inventory costs without sacrificing the quality of your goods or affecting your customer experience. Consider:

  1. Reducing inventory - can you reduce the amount of specific items that you store, based on your current and projected demand?
  2. Negotiate better prices - can you reach out to your suppliers and ask for discounts or better prices on key supplies?
  3. Optimize inventory and prices to demand - you also want to optimize your inventory against existing orders as well as the forecasted number of sales. Keep adapting your prices and supplies as customer demand continues to change.

Another option is to move towards "just-in-time" inventory or dropshipping, which means that customers order and products ship directly, meaning that you don't need to pay warehousing costs.

Customers

You might also consider cutting "painful clients" - some customers can be more trouble than they are worth. They might complain or pay late. If these customers cost more than they are worth, cut them loose. Then you can be laser-focused on the right customers that are profitable for your business.

Another option is to re-evaluate your customer management process. For example, if you run a service-based business, can you think about how you serve customers from start to finish, and if there are any parts that you can cut out or improve, in order to save costs? While you don't want to cut corners, perhaps there are opportunities to cut non-essential parts of the customer experience.

Labour

One of the most expensive parts of a business is typically labour - your employees. Unfortunately, if you've made other cuts to inventory and your business, and you still aren't able to make your bottom line, you'll likely need to face some tough decisions with your staff.

Before making layoffs, first consider: what can you outsource? Payroll? HR? Legal? Or accounting? There are a number of areas that aren't core to the day-to-day operations of the business to keep it running that you might be able to temporarily or even permanently outsource. You can search for local firms that might serve your business, or otherwise ask a local small business association or community if they have any recommendations.

If you do have to make layoffs, it's important that you review your business as a whole to see where the greatest cost to benefit tradeoffs are for your employees or contractors. Also, it might be worth reviewing the contracts that you have with them, including any relevant employment or workplace policies.

Remember, if you do have to let anyone go, a recession is a situation that is out of your control. Calmly explain the circumstances to the person or people involved, be empathetic, and also considerate and helpful of anything you can to do to make it easier for them. But remember, you've done the best that you can, and making tough decisions is part of running a business. Your goal is to ensure the survival of your company.

3. Diversifying your product

One of the challenges that many businesses run into during a recession is that they only have one or a few different main products, and only one main channel of delivery, for example in person. While for some businesses, this may be the only option, there could be other ways to diversify what you offer.

Having multiple streams of revenue allows your business to stay flexible and persevere through tough times. But remember - diversification of your product does not need to mean "different". Do not just add other products or services and create a huge menu.

Instead, look at multiple options to enhance your core products. What makes them unique? What could make them easier to buy and access? Also, which parts are extras and might be able to be dropped?

Another decision that you might want to make is to drop unprofitable products or services. What costs almost as much money as it is worth? Or, if there are side/small revenue sources that aren't really core or important to the future of the business, considering cutting them.

There are various options to consider to diversify your product offerings:

  1. Physical to digital - if you have a primarily physical product or set of products, you may want to consider developing a digital version, or a digital way that people can get access to your product. For example, many schools have quickly turned classroom lectures into downloadable online courses. Many restaurants have rapidly turned their traditional phone ordering systems into apps or made their food available through food delivery apps. Alternatively, if you normally offer digital services but want to consider a physical offering, perhaps there are ways to print or package what you offer and safely distribute it to your customers
  2. Monthly/recurring memberships - another option to diversify is to offer a membership. Instead of a one-time purchase, you can enable customers to subscribe to what you offer, which can help you have more predictable sales from month to month. Members could access discounts or special promotions, or perhaps you send them occasional gifts, surprises, or a newsletter.
  3. One on one consulting/personalized service - if new customers have slowed, you might want to consider offering one on one consulting, or a highly personalized service. You could charge a higher rate and provide a flawless customer experience
  4. Ad revenue - this may not work for most, but it would entail adding Google ads to your website and getting paid for clicks.
  5. Sponsored content/endorsements - if you have a popular blog or social media channel, you might be able to get other companies to pay for posts.

4. Creative and inexpensive marketing tactics

Once you have managed your finances, cut costs, and diversified your product, you may have an opportunity to take any savings and apply them to sales and marketing.

Some will advise you that sales and marketing is a cost center - and there are some less useful activities. But overall, a recession can be the time to double down on sales and marketing. particularly to existing customers - because it is much cheaper to get past customers to buy again than to acquire totally new customers.

Here are some tactics that you can use for creative and inexpensive sales and marketing:

  1. Clarify messaging - focus on one core customer group and target them with your messages. Simplify and make it very clear for them what you do and what you can be for them. You might even want to consider creating new banners or on your website a very simple graphic that tells them what they can get from your business, for example from a recession deal.
  2. Affiliate marketing - this means paying commissions to partners or affiliates who bring you new customers. Consider working with a complementary business or recruiting affiliates who can help you bring in new business.
  3. Collaborate with your community - see if there are any community initiatives being posted about on social media that you can link up with. Alternatively, look for nearby local businesses and organizations that you could work with on a package offering, then publicize it together.
  4. Advocate marketing - similar to affiliate marketing, this involves mobilizing your regular, happy customers and anyone who is a friend of your business - an advocate - to help you grow. That could involve asking for new customer referrals or for positive online reviews. Consider creating a challenge or competition for your advocates to get you new customers or to post online about your business.
  5. Go after the competition - you can also try researching your competition and their customers, to see what deals you can offer to entice them away. Try reaching out to and talking to a few of their customers and see if you can create an advertisement to draw their interest.

Final takeaway: Give yourself peace of mind

Of course, more than any advice, it's important to maintain your health, number one. No business is worth more than your life or your safety. Please take care of both your physical health by social distancing, as well as maintain your mental health as an entrepreneur. If you stay well during this time, you'll weather the storm.


For more help during the COVID-19 period, we have specific resources to help here.

By Jaxson Khan

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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