Preparing Your Business and Staff for a Recession
It’s inevitable. The market will eventually enter a recession. If not this week or this month, possibly years down the road.
Either way, part of owning a business is knowing how you can prepare your staff and company for a recession, should one ever be headed your way.
Read on to learn more about how you can prepare your business and staff for a coming recession.
What is a Recession?
A recession is a period in which the economy declines rather than grows. It’s important to note that this is not the same as a depression, where the economy stays at all-time lows for a prolonged period of time. Rather a recession just sees a decline in sales, among other disheartening indicators.
This downturn must last at least a couple of quarters in order to qualify as a true recession. It also must affect all parts of a sector or multiple sectors of a market.
Why You Should Prepare for a Recession
Unfortunately, recessions disproportionately affect small businesses, and one study performed during the great recession from 2007-2010 showed that over 5% of businesses per year ended up closing due to the economic downturn.
The point is, no matter what type of business you are running, there is a huge chance you could go under during a prolonged, difficult economic period like a recession. The only way to prevent this from happening is to take steps in advance to prepare for a recession.
Some preparations are easier than others, but you should take the time to do as many things as you can to prepare your business and staff for difficult times before they arrive. After all, there’s no use in preparing for a hurricane after it’s already happened.
8 Steps to Prepare for a Recession
Whether you think negative economic times are on the horizon or not, here are some steps you can use to prepare your business for a coming recession.
1. Save Money
Is your business operating on thin margins? This is a recipe for disaster during tumultuous times. Although it may not be a recession now, it’s time to take a look at your profits and save what you can for the future.
Every business needs to have at least a couple of months of expenses in reserve, the more, the better. You should be building that buffer now while sales are plentiful.
When you start trying to save, you may discover that your margins are too thin to allow you to do so. Now is the time to make price changes, so that isn’t the case because if you make price changes after you have already started losing a large number of sales, it will only quicken the process.
The companies that don’t last through a recession are those which only offer one product. Offering only one product, even in the best economic times, is risky because a replacement for that product could be made tomorrow, putting you out of business even in a bull market.
Now is the time to consider diversifying your business into another area. For example, if you’ve only offered graphic design services in the past, consider offering copywriting as well, in case something were to happen to the graphic design market.
If you are creating a new product, remember the sales cycle and how long it takes to bring a product to market. If the market is in a downturn already, it probably isn’t the best time to introduce something new, but this doesn’t mean you can’t still diversify.
One of the best ways to diversify in a market that has already gone sour is to partner up with another business where you offer their product, and they offer yours.
It may also be time to look at other sales tactics for your products. For example, in the past decade, many companies have found success selling products with subscription-based selling.
3. Lower Expenses
Take a look at your budget. Are you spending close to what you make each month (besides the amount you are saving?) This isn’t a good idea when a recession is approaching, and it’s best to cut spending now.
This doesn’t mean you are going to cut corners, just unnecessary spending. If you spend enough time looking at your budget, you will find something that can be cut, for example, maybe an employee has been asking to go part-time, and now would be the time to grant that request.
Perhaps you’ve got an employee who has submitted their notice. Rather than investing money into a lengthy hiring process, consider hiring a contractor to do the same job. This will give you a skilled employee that you can lay off much easier if times get tough.
4. Make Changes to How Employees Work
One of the biggest expenses most offices have is well, the office itself. During the COVID-19 pandemic in 2020, many businesses found that employees work just as efficiently at home as they do in the office.
Therefore it might be time to take a big step and downsize your office space. While you may not be able to send all employees to work from home, send the ones that you can, and get a smaller office space just for those that have to be there in person. This can free up lots of capital for other areas of the budget, plus your employees will probably love it.
5. Be Honest With Your Employees
The number one complaint employees have when they are laid off is that they didn’t see it coming or that their job lied up until the last minute that there would be layoffs. While it may seem odd, don’t lie to your employees.
Now you shouldn’t go right out and say there will be layoffs, but be open with your employees about how layoffs could look (who is at risk? Who would go first?) Then let them know that you are open to ideas for helping the company save money or methods for increasing sales.
You may just be surprised at how understanding your employees are because of your honesty, and they may just have an idea to boost sales you haven’t thought of yet!
Many companies don’t want to tell their employees there might be layoffs because they are afraid the employees will find new jobs. This is never a reason not to notify your employees of a potential layoff.
If they do go out and find another job, this is good for you, as you can either have their position absorbed or hire a contractor to replace them. Either option sets you up better for a recession than if the employee had stuck around.
6. Be Reserved With Market Predictions
During a booming economy, it can be easy to estimate that sales will continue to grow indefinitely and advise that your company orders more and more inventory. This thought process can go bad very quickly, however, as you may find yourself stuck in a recession with a factory of inventory you can’t sell.
Instead of expecting continued exponential growth, make more reserved predictions for future sales, and adjust your inventory accordingly. It may also be worthwhile to see if you can order products more frequently, allowing you to make smaller changes based on actual sales rather than predicted growth.
7. Consolidate Debt
All businesses start off with debt. While this debt is necessary for starting a business, it can also be a business’s downfall during a recession.
The time to review the debts of your business is not once the recession has started but rather before it even begins. While your company is experiencing a period of growth is when you should look at your debt sheets.
After you have your nest egg, consider paying down high-interest debt as quickly as possible. You can also take the time to consolidate debt or even negotiate a new interest rate for some of your most expensive debts.
8. Establish Warning Signals
By now, you should be fairly prepared for a coming recession. But don’t get wrapped up in the preparations so much that you forget to also establish what signals you need to be watching for that a recession is here and it’s time to start scaling back.
If you have a CFO, this job is probably best assigned to them, as they will be able to watch the cash flow and alert you when there is a fall or significant reduction. If you run a smaller business, make time to sit down each week with the financials each week, taking note when downward trends begin to form.
Remember, one bad week of sales doesn’t mean you are in a recession. But if you notice a downward trend over more than four weeks, it might be time to slow your inventory ordering and schedule staff for fewer hours.
Signs a Recession is Imminent
It’s impossible to fully predict when a recession will arrive, but there are a few signs you should be watching for as a business that may indicate that a recession is imminent.
1. High Inflation
Recessions typically follow periods of high inflation because many of the remedies for curbing inflation can lead to a recession. When there is a period of high inflation, this is a good time to start preparing your business for a recession.
2. Economic Instability
In the modern age, much of the world is dependent on other parts of the world to provide goods and services. When these supply chains begin to be disrupted by war, famine, and policy changes, this is a sure sign that a recession is on its way.
3. Changes in the Investment Market
You aren’t the only one watching for signs of a recession, as most Americans are also watching. Therefore watching their behavior can let you know if a recession may be on its way.
If the majority of Americans are switching from high-risk to low-risk investments, this tells you that they are worried about their money as well and are more afraid to lose it. A recession might be right around the corner.
4. Lower Consumer Spending
This is one of the more obvious signs, but as a recession begins to loom, consumers will lower their spending. Your CFO, or whoever handles your inventory, should be watching for this sign in particular, as this is one that will directly impact your business.
5. Decline in GDP
The final sign to watch for, which is also the clearest, is a drop in GDP. Once a drop in GDP occurs, it is almost 100% likely that the country is in a recession, and it is time to start hunkering your business down to survive.
How Do You Know Your Business is Ready for a Recession?
Have you done everything on this list but aren’t sure if your business is truly ready for a recession? The best way to know is to take a look at the financials of your business.
Do you have a reserve of cash to last you for a few months? Then you are more prepared than most other businesses out there. If you also have high margins, contingency plans for excess staff, and a variable inventory you can adjust within a few weeks’ time, then you are more prepared for a recession than most businesses on the market.
Ready to Prepare Your Business for a Recession?
No matter how you look at it, preparing your business for a recession is a necessary part of owning a business. Whether you are in the service or products sector, a recession hurts businesses everywhere, and many could go under.
Help protect your business from going under by preparing in advance and if your business is struggling, in general, to make ends meet, even in a booming market, take a look at how to win an audience as an underdog brand to help you to find your place in the market.