Navigating Economic Downturns: Four Imperatives For Small Business Survival

Key Summary

• Prepare for Inevitability: Because economic recessions are cyclical and potentially damaging, business leaders must shift from working "in" their business to working "on" it by proactively developing a survival strategy.
• Strengthen Financial and Operational Foundations: Businesses should diversify their revenue streams to target more resilient sectors, prioritize the security of cash flow and liquidity, and maintain a 6- to 12-month financial cushion.
• Maintain Oversight and Culture: Success during downturns relies on consistently monitoring Key Performance Indicators (KPIs) to pivot away from underperforming areas, while simultaneously practicing transparent communication to retain high-performing talent.

Like death and taxes, recessions are inevitable. Driven by business cycles, geopolitics, pandemics and policy missteps, the economy periodically experiences recessions. There have been 9 recessions in the last 50 years, averaging about every 6 years, including the Great Recession (2007- 2009) and the Covid Recession (2020). Today, recession anxiety runs high among business leaders in the face of geopolitical uncertainty.

On average, recessions have lasted 10 to 11 months and can have severe economic repercussions for most businesses. Given this reality, it is prudent for every business to prepare for an eventual economic decline. For small businesses, this preparation can be the difference between business survival and failure.

Innovating and constantly evolving to meet the needs of your customers now and in the future is critical. In fact, in times of economic uncertainty, it is wise to take the advice of author Micheal Gerber from his book, The E-Myth Revisited, when he says, “work on your business, not in it.”

Entrepreneurs, business owners and leaders can take four strategic steps to prepare for a recession and respond productively when it eventually occurs.

1. Diversify Revenue Streams and Make New Business the #1 Priority

When a recession hits, your service or product may not be considered “essential” so it’s important to evaluate recession-resilient lines of business in advance. For example, if you’re a catering company working with a corporate client base, you may want to consider diversifying into less economically sensitive businesses like government agencies, schools, or veterinary and medical practices.

For small businesses especially, it can be difficult to find money for marketing and sales support to attract new clients. However, you can grow your business organically, including by optimizing email campaigns, social media engagement, participation in pop-ups and events, and by forming partnerships for referrals. If you’re a spa, you can seek referrals from traditional doctors’ offices, physical therapists, general practitioners, fitness trainers and gyms. Each one of those referral sources has a customer base that if tapped, expands your outreach.

Your business should constantly innovate to meet the changing demands of your customers and community. In economic downturns, consumers reevaluate their needs and necessities, and consumer priorities shift significantly during these periods.

2. Protect Cash Flow and Liquidity

In times of uncertainty, you must ensure that your businesses’ cash flow and liquidity are protected. Start by putting a good accounting and reporting system in place to help you track and manage your cashflow. Further, forecast cash flow and include scenario planning, including plans to reduce non-essential spending and delay discretionary spending, if needed.

Some costs are non-negotiable when it comes to business operations. However, you can shave them down by renegotiating with vendors (or selecting new ones), assessing and more effectively leveraging outsourced services, and reducing or refinancing high-interest debt wherever possible.

Build and preserve a 6- to 12-month liquidity cushion to prepare for the worst. Consider setting aside a fixed percentage of monthly revenue to steadily build this cushion over time and revisit as your cost structure evolves. If you qualify, you can also ensure liquidity through a committed bank line of credit. Having this financial buffer provides flexibility to maintain operations, retain staff, and make strategic decisions in times of stress. If you wait until the stress occurs, it is highly unlikely that you will be able to source the cushion you need, and highly likely that your actions will be reactionary and panicked.

3. Continuously Monitor Business Health

Keeping track of your business’ health on a consistent basis is key to surviving an economic downturn. To stay ahead, establish and monitor key performance indicators (KPIs) for your business and its sectors. Knowing these business health factors and monitoring them weekly, monthly, and quarterly can help you be proactive in staffing, compensation and bonuses, and inventory investment.

It is vital to conduct regular reviews of the following:

• Revenue performance by segment: reevaluate product and service offerings based on current demand.
• Profitability, and more importantly cash flow, by product/service line: pause low margin, capital and working capital intense initiatives, and reallocate resources toward higher-performing products and services
• Customer retention: assess loyalty trends and identify opportunities to strengthen relationships

Identifying underperforming areas early and acting on them right away will help your business respond proactively to economic challenges.

4. Retain a High Performing Team and Communicate Transparently

Maintaining a high-performing team is critical. As the Harvard Business Review states, “while some departments may benefit from thoughtful restructuring, others face a far more damaging outcome: the loss of mission-critical team talent.” Although restructuring may be the only option when navigating economic uncertainty, it must be done carefully, as a range of top-performing employees bring value to the business.

Conduct informal evaluations, recognize achievements, and enhance communications during downturns. Employees appreciate candid communication about business conditions and expectations. Be realistic in your communications about the state of your business so employees aren’t feeling left in the dark. When leadership is transparent it builds trust and stability during uncertain times, which in turn will maintain and improve productivity.

Set Priorities Now and Execute the Plan

Economic downturns usually can be seen coming in advance, but sometimes they are unexpected and business leaders need to have a plan in place. Diversifying revenue streams, protecting cash flows and liquidity, constantly monitoring business health, and retaining a high-performing team are four priorities businesses should consider when going through one.

Recessions are a test of leadership. Businesses that stay disciplined and act on these four imperatives in advance of a serious downturn will be positioned to move faster and strategically outperform their competitors when conditions improve.

Connect with an Old National Small Business Banker for more insights to help your business grow.

This article was written by Rob Falzon from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.