A recent survey revealed that 81% of CEOs believe a recession is on the way. And unfortunately, many businesses may not be prepared. A quarter of small businesses don’t have enough cash reserves to make it through a two-week downturn. An analysis by McKinsey also revealed that as many as 500 large and mid-sized US companies aren’t well-positioned for a recession. This is due to factors like high levels of debt, operational challenges, declining market share, and challenging cash positions.
So what can businesses do to get ready? Here are some steps you can take to prep for a potential recession as a small business owner or solopreneur.
Increase Cash Flow and Savings
Cash flow is crucial for small businesses, especially during a recession, so you should take steps to shore yours up.
When you’re busy fulfilling orders and managing day-to-day business operations, it’s easy to forget to invoice your clients and check to see if they’ve paid. Make sure you’re staying on top of your receivables and enforcing due dates. If clients consistently pay late, it may help to implement a late fee. If you don’t collect deposits, asking your clients to pay 25% or 50% upfront can also make a big difference in your cash flow.
Building your business emergency fund is also a crucial part of prepping for a recession. As mentioned above, about a quarter of small businesses don’t have enough cash on hand to make it through a two-week downturn. This makes them much more likely to fail during a recession. To protect your business, financial experts recommend that you set enough money aside to cover operating expenses for three to six months.
As a freelance writer, I don’t have many business expenses. However, I rely on my freelancing income to pay my bills, so I’ve been working on building up my emergency fund over the past few months. This has given me peace of mind and helped me feel confident in my ability to weather a recession.
Be Prepared to Pivot
During the last recession, businesses had to adapt to pandemic-related shutdowns and find new, socially distant ways to serve customers. Although the potential recession in 2023 probably won’t require quite as much pivoting, it’s still a good idea to consider how your business can respond to changing economic conditions.
As a freelancer, my primary concern is that clients will pull back on marketing and outsource less work if the economy enters a recession. Many companies rely on their in-house staff more during downturns and let a lot of their freelancers go. I don’t want to be left scrambling for work if this happens, so I’m trying to find ways to adjust my service offerings to match these potential changes.
One option I’m considering is consulting. Clients who want to move their marketing in-house might still need a content strategy or SEO plan that their staff can follow. Clients may also want an expert to audit their blog and let them know what could be improved. Leveraging my skills and experience into a new service offering and income stream will help make my freelancing business more resilient in the face of a recession.
Try to Look at the Positives
Although recessions create hardships for businesses and consumers alike, some positives can come out of a tough economic situation. Companies that have ample cash reserves may be able to purchase discounted equipment and inventory from businesses that are struggling and liquidating assets. Since company valuations often decrease during downturns, well-positioned businesses may also be able to pursue cheaper acquisition opportunities in the next recession.
The potential recession is also an opportunity to reexamine your business expenses and trim any unnecessary fat, like subscriptions you aren’t using. This will make your operations budget leaner and help increase cash flow and profits, which is beneficial whether or not a downturn ever materializes.
The fact that a recession may be on the horizon can feel unsettling and scary, but try to stay focused on how you can improve and protect your business. Maintaining a positive, growth-minded attitude will put you in a better position to weather a recession than letting fear and anxiety take over.
Do you think a recession is on the horizon? How are you preparing? Let me know in the comments section below!
Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.