For months, the looming recession has been on everyone’s mind. In October 2022, 91% of CEOs said one would occur within the year. And in December 2022, Forbes found that large tech companies, banks, and manufacturers had laid off nearly 125,000 employees to prepare.
With the March 2023 Silicon Valley Bank collapse, concerns of a recession became even louder. In fact, the Federal Reserve announced that a mild recession was likely in 2023.
What’s a small business owner to do? Although 72% of U.S. small business owners are concerned about a recession, 76% are confident they’ll survive. Read on for tips on surviving a recession and thriving afterward.
Table of Contents
- What is a recession?
- How to survive a recession in business
- Plan first, panic second: Quick tips for a recession-proof business
What is a recession?
According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Generally, the economic activity includes:
- Real personal income (minus government transfers)
- Nonfarm payroll employment
- Wholesale-retail sales adjusted for price changes
- Consumer spending
- Industrial production
A recession can last anywhere from a few months to several years. Since World War II, the average recession is 10 months. The longest recession since WWII was the Great Recession, which lasted from December 2007 – June 2009. When a recession “ends,” most people still feel its effects for months or even years (e.g., high unemployment rates).
Recessions impact anyone and everyone. But according to the Small Business Administration (SBA), entrepreneurs are the most likely to bear the brunt of periods of economic decline.
What causes a recession?
Generally, recessions happen at least once every 10 years. So what causes them? And, how do you know if one is coming or not?
Causes of a recession may include:
- High interest rates
- Stock market crash
- Rising oil prices
- Drop in house prices
- Loss of consumer confidence
Recessions can generally be attributed to an economic shock, like a disruption to the supply chain, a financial crisis, or the Federal Reserve’s rate hikes. The economic shock then leads to a cycle of decreased consumer spending, lower business profits, and rising unemployment.
Signs that a recession may be coming include drops in consumer spending, decreased personal income adjusted for inflation, and high unemployment rates.
How to survive a recession in business
Between COVID-19 and the looming recession, these past few years haven’t been easy on business owners. But business owners are resilient. Here are several ways businesses can learn how to survive a recession.
1. Cut costs
Running a business during a recession is difficult. It requires you and your employees to implement a mix of strategies and make adjustments specific to your business. One universal strategy for surviving a recession? Cutting costs.
A business needs profits to operate. To make a profit, you need to have higher incoming money than outgoing money. But during a recession, consumers spend less. And if your sales decrease, your profits will, too—unless you cut back on spending.
Cutting costs to prepare for a recession isn’t new. Do a quick Google search, and you’ll see it’s one of the top recommended strategies for surviving a recession. In fact, 58% of business owners have already been looking for areas to cut expenses.
There are four main ways to cut costs:
- Completely eliminate the expense (e.g., cancel your streaming subscription)
- Scale back the expense (e.g., downgrade to a lower streaming tier)
- Negotiate a discount on the expense (e.g., ask the streaming service for a discount)
- Shop around for an alternative (e.g., go to another streaming service)
To figure out the best cost-cutting strategy, make a list of all your business’s expenses. You should be able to find this information in your budget or small business general ledger. Think about what activities you have to do and what expenses you can eliminate.
Examples of ways to cut costs include returning inventory to vendors, switching to more affordable payroll software, and canceling a business magazine subscription.
Examples of cost-cutting strategies
Do you know how to survive a recession by cutting costs? If you’re not sure where to start, consider making a table or spreadsheet and listing each expense. Then, add a column for each possible decision, like canceling the expense, reducing your spend, negotiating a discount, and shopping around. For example, you could create something like this:
|Expense||Cancel||Scale Back||Negotiate||Shop Around|
|Email marketing software||X|
|Advertising on Facebook||X|
|Advertising on radio||X|
Let’s say you find that your commercial lease is too expensive. According to a webinar on recession-proofing your business, you can cut back on rent by:
- Negotiating your lease
- Moving to a smaller space
- Subletting your space
- Sharing the space with other businesses
- Working from home
What about layoffs?
The employees on your payroll are arguably your most expensive business expense. That’s why many business owners who want to cut costs start with layoffs. During the Great Recession, 2.1 million Americans were laid off in 2009.
But according to the Harvard Business Review, layoffs can be a costly way to cut expenses. The HBR reported that the companies that emerged the strongest from the Great Recession were those that “relied less on layoffs to cut costs and leaned more on operational improvements.” Why? Because businesses that lay off employees may deal with low morale, decreased productivity, and high hiring and training expenses when the recession ends.
Some ways to limit layoffs include:
- Shortening employee hours: Employers may choose to cut employee hours, which may qualify them for partial unemployment.
- Cutting salary and hourly wages: For example, Intel cut salaried employees’ pay by 5% – 25% in response to a drop in revenue in 2023.
- Implementing a furlough: A furlough is a temporary leave that requires employees to take a temporary, unpaid leave of absence.
Keep in mind that, for many businesses, some level of layoffs are often inevitable during an economic downturn. In many of the Harvard Business Review studies, businesses still had to lay off employees. But, they were able to limit the number of employees laid off by cutting hours and furloughing employees.
2. Look at things differently
Like anything in business, a recession is a change (albeit a big change!). And when things change, your response is what matters most.
On the topic of surviving an economic downturn, the Small Business Administration says:
The challenge is to be aggressive and imaginative. Entrepreneurs who survive and even prosper during hard times must be able to look beyond the present, to overcome the constraints of tradition, to see the firm from a new perspective, and to do business differently.”
The SBA is challenging small businesses to think about ways they can do business differently during economic downturns. This can include everything from your company’s processes to its marketing efforts to how you interact with other businesses. For example, you may find that collaborating with another business benefits both of you during a recession.
Be willing to go over everything in your business with a fine-tooth comb. Consider doing an internal audit to see where you can make changes and improvements.
Tip for Success: If you want to do business “differently” during a recession, you need to first do your research. Consider what your customers’ changing needs are (e.g., saving money) and stay up-to-date on what’s trending. Brainstorm ways you can best serve your customers that may be different than what you’ve done traditionally or what your competitors are doing.
Bonus: Increasing efficiency
When learning how to survive a recession, you may pinpoint ways to improve efficiency. Most business owners look for ways to cut costs in business. But your time (and your employees’ time) is money, too.
You also need to look for ways to maximize your time so you can spend time where it counts. You don’t want your team spending too much time on tasks that aren’t going to result in much for your business.
Always keep your return on investment (ROI) at the forefront of your mind. Patriot Software’s CEO, Mike Kappel, likes to challenge employees to always keep the following quote in mind:
Is the juice worth the squeeze?”
To increase efficiency in your business, you may ask yourself questions like:
- Are we wasting time on manual processes?
- Is the work my employees are doing repeatable and sustainable?
- What are my employees’ strengths and weaknesses?
- Is my team spending their resources in the right place?
- Could certain processes be automated or streamlined?
3. Focus on relationships
To recession-proof your business, focus on the relationships you develop with everyone you work with. This includes your customers, vendors, and lenders. Managed well, these relationships will last far beyond the recession.
During a recession, consumer spending decreases. Customers may be more choosy over who they do business with. They might reserve their spending only for businesses they like, know, and trust.
To prioritize customer relationships, you can:
- Gather feedback from customers (e.g., a satisfaction survey)
- Offer a payment plan to help customers who are struggling financially
- Provide an exceptional customer service experience
- Attend relevant networking events
- Set up a refer-a-friend program
- Underpromise and over-deliver
Vendor and lender relationships
When consumer spending decreases, business profits drop. If you run into cash flow problems, reach out to the people you work with. You’re their customer, after all, and they may be prioritizing customer relationships, too!
You might be able to negotiate with vendors to get different credit terms, discounted pricing, or waived late fees. You may even be able to trade goods and services on a barter exchange, the SBA suggests. The SBA also recommends strengthening your banking relationships and letting lenders know your financial position.
If you’re struggling to make a payment, communication is key. Like you with your customers, many vendors and lenders value your relationship, especially if you have a strong track record of on-time payments.
4. Have a cash reserve
Do you have an emergency fund for your business, known as a cash reserve? A cash reserve can help you meet short-term financial needs and help you avoid taking on new debt when money is tight.
During a recession, a cash reserve is a lifeline for many businesses. When sales decrease, your cash reserve can help you cover expenses and employee paychecks.
Build your business’s cash reserve by setting aside 5% – 10% of your income. Ideally, your cash reserve would be able to cover 6 – 12 months of operating expenses.
To accrue more interest on your cash reserve, you might consider using an online savings account or certificate of deposit (CD) with a high-interest rate. But if you use a CD, you can’t touch your cash reserve for a set period of time. This can be risky if you suddenly need to access your funds.
5. Increase sales
Consumer spending drops during recessions. But spending doesn’t stop altogether. Customers always need to buy food and other necessities, for example. As a result, there are still ways to increase sales—even during a recession.
You can increase sales by:
- Trying new marketing strategies
- Offering incentives and promotions
- Extending your business hours
- Establishing a loyalty program
- Monitoring and marking down old inventory
- Measuring your sales each day (e.g., what did you sell?)
Sweeten the Deal: A recession, more than ever, is a time when consumers don’t want to commit. They may be fearful of spending their money. Offer things to ease their fears, like a warranty, money-back guarantee, or free trial.
How can I increase sales if I cut my advertising budget?
You might be wondering how you can cut advertising costs and still increase sales. But according to the SBA, reducing advertising and promotional expenses could hurt you.
Studies have shown that those maintaining or increasing ad outlays during slowdowns wind up outselling rivals who cut back.
Savvy marketers can boost sales and market share, even if the industry in which they compete is in a slump, by focusing on short-term tactical techniques such as sales and price promotions (including cents-off coupons and rebates), and tailoring advertising in response to the shaky economic climate.”
Long story short, don’t wind down advertising during a recession (if you can help it). You may opt to increase your ad budget, especially if your competitors scale back theirs. However, the SBA does advise spending every ad dollar carefully and making sure your marketing efforts are the most cost-effective.
6. Don’t take on more debt
It may be tempting to take out new lines of credit or loans to help your business manage periods of low cash flow. But, doing this can hurt your business. Most experts advise against seeking additional credit during economic downturns.
If cash is tight, first look for ways to cut costs, increase sales, and work with vendors and lenders before taking on more debt.
Pro Tip: Always keep your debts in check. The Harvard Business Review found that companies with high levels of debt are particularly vulnerable during recessions due to interest and principal payments.
Plan first, panic second: Quick tips for a recession-proof business
A recession is nothing to scoff at—even if the media has been talking about it for nearly a year. By planning first (and panicking second), you can ensure your business is prepared for the worst.
When you hear “recession,” your focus might be on surviving. But in many ways, a recession can provide a unique opportunity to rise above the competition and develop deeper customer relationships. With the right plan and willingness to adapt, you can go beyond learning how to survive a recession and focus on thriving.
According to the SBA, small businesses can use a recession to “outsmart larger competitors” by:
- Taking away market share from competitors who can’t adjust as quickly
- Maintaining a strong cash flow
- Making changes that will better position the company post-recession, such as cutting costs and improving operations
How to survive a recession: Do’s & Don’ts
Surviving a recession looks different for every business. Take a look at the following quick list of do’s and don’ts for companies preparing for a period of economic uncertainty.
|Surviving a Recession: DO’S||Surviving a Recession: DON’TS|
|Free up your time from mundane tasks||Conduct business as usual|
|Be willing to get innovative||Make risky decisions|
|Look at areas you can cut costs||Rely solely on layoffs to get through|
|Keep cash in reserve||Take on more debts|
|Work with customers who may be struggling||Expect consumer spending to stay the same|
|Communicate with lenders and vendors||Go radio silent if you’re struggling to make payments|
Save your time and money before, during, and after a recession. With Patriot’s online accounting software, you can manage the money going in and out of your business with ease. And, use our online payroll to pay employees in three easy steps. Sign up today and enjoy a free trial of both software products!This is not intended as legal advice; for more information, please click here.