COVID-19 has taken over our newsfeeds, our imaginations, and sadly, our small business finances. We can’t help with the first two, but we do have some thoughts on getting financially fit for a down-economy.
Should you cut costs, or get more ambitious with spending? Should you borrow and make sure you have a financial cushion, or get rid of all your debt and stay as lean as possible? Should you even be making any drastic changes to your business in the first place?
Here’s a list of five things you can take action on for your small business to get, and stay, recession-fit.
1. Understand where your money is going
Knowing your numbers is a good ideas regardless of whether you’re in a recession or not. But in a recession, the margin for error becomes a lot narrower.
When you have up-to-date bookkeeping and monthly financial statements, you can always see exactly where you stand financially. That way, you know where you’re over-spending so you can cut costs (“woah, why have I been spending $1,500 a month on cloud hosting services??”).
And if you use a daily cash flow dashboard like Mint or Pulse, you’ll know your cash situation without hopping between bank accounts. No more queasy feelings in your stomach, “I think I’m doing okay financially.” You’ll just know the answer, whether it’s good or bad. That is really important during a financially uncertain time.
2. Do more with your assets
This is another thing you should be doing, recession or not.
But researchers at Villanova University and the University of Lisbon say it’s particularly crucial to do this if you plan on surviving a recession.
In a 2017 paper, they analyzed the performance of more than 1,600 Portuguese small businesses during the 2008 recession and found that businesses that focused on improving returns on their assets had the highest probability of succeeding.
“The results show that improving returns on fixed assets has the highest impact on operating profit, followed by gains from increasing returns from intangible assets,” write Patel and Guedes.
In other words: the businesses that did the most with their assets were most likely to survive the Great Recession.
Not sure how to make the most with the assets you already have? Here are some tips:
- Got excess inventory? Maybe it’s time to clear stock with a promotion.
- Have some excess cash on hand? Maybe it’s time to think of ways to re-invest that money into the business.
- Are your clients behind on payments—or, in accounting speak, do you have lots of accounts receivable on the assets side of your balance sheet? Maybe it’s time to have an awkward-but-worth-it chat with them about paying their invoices on time
- Have a nice office or warehouse space? Consider renting it out for photoshoots on a platform like thisopenspace.
3. Offload your high-interest debt
Once you’re done looking at your assets, it’s time to look at the number one killer of small businesses during recessions: debt and interest payments.
At least, that’s what Xavier Giroud of MIT and Holger Mueller of NYU discovered in 2017 when they looked at thousands of companies that failed during the last recession. Giroud and Mueller found that most of them had one thing in common: they had a lot more debt going into the downturn than the ones that survived.
“The more debt you have, the more cash you need to make your interest and principal payment,” Mueller told the Harvard Business Review earlier this year. Letting interest payments get away from you is bad in any situation, but during a recession, it can put your business into a tailspin.
So how do you prevent this? Wendy Liebowitz from Fidelity Investments suggests a methodical approach.
“Prioritize debts from highest rate to lowest rate, and start paying down the highest rate debts,” she told Vice in 2018. “High-interest rate debt should be addressed first since you do not want that to accumulate and become a greater debt in the future.”
4. Take the long view, and don’t be reactive
Marcus Drawshaw runs an investment advisory firm and a boutique wine store out of Long Beach, California. While businesses up and down the street from him closed down during the 2008 recession, both of his businesses survived without much damage. What’s his recession-survival secret? He says there isn’t one.
“Let’s say those forecasts about a coming recession are correct. Is there anything you should do differently to prepare for it today? I’m not sure what you can do, except run your business the way you should,” he says. “For example: you should be paying attention to your expenses. You shouldn’t be spending more money than you should be.”
Instead of reacting to the latest forecasts, Drawshaw says small businesses are better off doing what they should always be doing: not overspending, making sure they have a financial cushion, and keeping an eye on the long term.
“Somebody who is very worried about a recession should position their business to withstand a year of negative growth,” he suggests.
“That’s probably what you should do when you start a business. But if you haven’t already, maybe now’s the time to go to your bank and say hey, can you extend me a line of credit? Not to use it, but just to have it there.”
This calm and collected approach might seem a bit unnerving to some entrepreneurs, but the numbers back Drawshaw up.
Back in 2010, a Harvard Business School study looked at the performance of 4,700 companies during the last recession and found that reactively spending or cutting during a downturn actually had a negative effect on a business’ performance.
“Firms that cut costs faster and deeper than rivals don’t necessarily flourish. Businesses that boldly invest more than their rivals don’t always fare better either,” wrote the study’s co-authors.
It seems like the best way to respond to a recession is to not respond at all, and to instead focus on running a healthy, efficient, profitable business.
But obviously, if you’re seeing that your expenses are outrunning your revenue, you’ll need to cut costs. If that’s the case, we have some ideas on how to do that.
5. Stay open to new lines of business
Staying the course is good advice for companies that experience a dip in sales during a recession. But what about businesses that fail entirely?
Oakland-based residential interior designer Sudha Marsh learned that the hard way during the 2008 real estate collapse. When she realized that she had run out of new clients, Marsh found herself branching out into less lucrative “staging” gigs—small jobs temporarily decorating a home for real estate showings.
“I started doing things that I had never done before. I started working for way less money, little jobs here and there,” says Marsh. “It was not what I was used to. It felt like a big step down. But I didn’t really have any choice.”
Marsh says that what saved her in 2008 was her ability to stay flexible, put up with the temporarily lower pay, and keep her mind open to new opportunities.
“When things aren’t working, you really have to look at doing things in a completely different way, and be open,” she says. “I could have been depressed and scared. But I did the staging thing for about three years, until 2012. From 2009 to 2012 I was busier than anybody I knew.”
Surviving the stress test of a recession
Getting your financial act together, doing more with your assets and keeping your debts low aren’t some kind of miracle cure for your business. They’re things that successful businesses already do all the time, recession or not.
What changes during a recession is that these things become a lot more important. You might be able to get away with not doing them during the good times. But when business gets tight, they can mean the difference between bankruptcy and survival.