Can your business survive an economic recession and still remain profitable?
Have you ever heard of the War of Worlds mass hysteria?
The story goes that on a chilly Halloween night in 1938, a guy named Orson Welles broadcasted an adaption of H.G Wells’ classic book “The War of the Worlds.”
He somehow fooled an entire population into believing an army of terrifying aliens was invading planet earth. (Or so it has been reported)
If you pay close attention to the news, you might see some similarities:
“The RECESSION IS COMING”
“The Trade War With China Will Impact American Wallets”
“Forecasters Call for Weather on Monday!”
If you enjoy feeling dread and misery, I encourage you to read news headlines every day.
While this isn’t a comparison (or me trying to discredit the media), many financial “experts” are historically terrible at predicting a recession. Like the fake radio broadcast, we need to take several steps back when looking at things we don’t understand.
Yield curve inversions come to mind.
It’s no secret that the economy has been in a state of flux for the last few years. Businesses large and small have had to learn how to operate in a tough new environment. But what happens when things take a turn for the worse and your business is hit by an economic recession? Can you still remain profitable, or will you be forced to close your doors?
While many like to think an inverted yield curve is the Nostradamus of an upcoming economic decline (they have not always led to recessions by the way), we need to make strategic moves for our finances and especially our business.
Either way, if the financial experts are justified in their reports, it’s important to build our own fortified “doomsday bunker” for our business and money.
Understanding what an economic recession is
Before we go further, it’s important to understand what an economic recession is.
An economic recession is a significant decline in activity across the economy, lasting longer than a few months. A recession can be signaled by two consecutive quarters of negative economic growth. It is visible in industrial production, employment (including a rise in unemployment), real income, dips in the stock market, higher interest rates, and wholesale-retail trade. A recession generally refers to a decline in GDP (Gross Domestic Product).
The National Bureau of Economic Research (NBER) is generally recognized as the authority that defines the starting and ending points of U.S. recessions.
One of the main characteristics of a recession is a decline in consumer confidence, which can be directly reflected in the stock market. During a recession, businesses and consumers alike cut back on spending. This can lead to a vicious cycle as businesses are forced to lay off employees, leading to even less consumer spending. The goal is to break this economic cycle by continuing to spend, even when times are tough.
How can an economic recession impact your business?
There are a number of ways an economic recession can impact your business. The most significant is a decline in revenue and profit. As consumers cut back on spending, demand for goods and services declines, leading to fewer sales for businesses. This can force businesses to lay off employees or even close their doors.
In addition to a significant decline in economic activity and sales, businesses may also face higher costs during a recession. The cost of raw materials and other inputs may rise as suppliers attempt to offset their own declines in revenue. This can put further pressure on businesses, leading to more job cuts and closures.
Here are some ways to protect your business & money during a recession:
Know exactly how your business will be impacted
Do people get hurt in a recession? Yes. Yet, like a double-edged sword, some people also get rich. This means the opportunity is available for those who understand what a recession means for THEM.
Companies running options will win. Real Estate opportunists will make a generous fortune. The “Sin” industry (alcohol, sex-related industries, tobacco) will send people to church every Sunday. Understanding the semantics around your business is imperative to staying afloat in a downturn.
Higher prices mean you need to adapt. Simple things, such as knowing where prices go on supplies and raw materials your business relies on, are key to staying ahead. With proper planning, we can help offset the loss of cash reserves and unexpected financial losses.
Understand your businesses risk factors and plan accordingly
There are a variety of risks businesses face, both in good economic times and bad. But during a recession, these risks can be magnified. That’s why it’s important to understand the risks your business faces and plan accordingly.
Some common risks businesses face include:
Credit risk: This is the risk that your customers will default on their payments or that you will be unable to get paid for your goods or services. This can be a particular problem during a recession as customers may have less money available and may be more likely to default on their payments.
Supplier risk: This is the risk that your suppliers will default on their obligations to you or that they will be unable to provide you with the goods or services you need. This can be a problem during a recession as suppliers may also be struggling with declining sales and may be forced to cut back on their own operations.
Market risk: This is the risk that your products or services will become less popular or that your customers will switch to competing products or services. This can be a problem during a recession as people may have less money to spend and may be more likely to cut back on discretionary purchases.
Operational risk: This is the risk that your business will face problems with its operations, such as disruptions to its supply chain or problems with its product or service. This can be a problem during a recession as businesses may have to cut back on their operations due to declining sales.
Financial risk: This is the risk that your business will face financial difficulties, such as difficulty meeting its debt obligations or having to sell assets at a loss. This can be a problem during a recession as businesses may have difficulty accessing the credit they need to continue operating.
To protect your business from these risks, you should have a plan in place to mitigate them. This may include diversifying your customer base, suppliers, or product mix; increasing your cash reserves; and strengthening your financial controls.
Have a financial cushion to weather the storm
A key part of surviving a recession is having a financial cushion to weather the storm. This means having enough cash on hand to cover your expenses for a period of time in case your revenue makes a significant decline.
For most businesses, this will require having some form of an emergency fund or line of credit that can be accessed if needed. This will give you the financial flexibility to weather a temporary decline in sales without having to make major cutbacks in your operations.
You should also consider diversifying your sources of revenue to help insulate your business from a decline in one particular area. For example, if your business relies heavily on consumer spending, you may want to diversify into other areas, such as B2B sales or selling to government agencies.
This will help reduce your reliance on any one customer or market and make your business more resilient to a recession.
Take steps to reduce expenses and save money
If your revenue declines during a recession, you may need to cut costs in order to remain profitable. This may include cutting back on discretionary spending, such as advertising or travel, and reducing your staff costs.
You may also want to consider renegotiating your leases or other contracts to reduce your costs. This can be a difficult process, but it’s important to remember that every bit you can save will help your business during a tough economic period.
In some cases, you may need to make more drastic changes, such as closing down some of your locations or selling off assets. These decisions should be made carefully, as they can have a significant impact on your business.
Be prepared to make changes to your business model
In addition to cutting costs, you may also need to make changes to your business model in order to survive a recession. This may include introducing new products or services that are more Recession-proof or shifting your focus to a different customer base.
For example, if you’re a luxury retailer, you may need to introduce lower-priced products or switch to selling more essential items. Or, if you’re a B2B company, you may need to focus on selling to government agencies or other businesses that are less likely to be affected by a recession.
Making changes to your business model can be a difficult process, but it’s important to be flexible and adaptable in order to survive a recession.
Market liquidity is not your only option
The stock market is a long-term game. Frantically selling assets is a desperate man’s game. You can shift your portfolio to stocks that generally ride any upward trends.
Create a diversification strategy
Businesses that have a diversification strategy are typically more resilient to an economic downturn. This is because they have multiple streams of revenue, so if one stream dries up, they can still rely on the others.
For example, a business that sells both products and services is less likely to be impacted by a recession than a business that just sells products. This is because people may be less likely to buy new products during a recession, but they may still need services such as haircuts, car repairs, and home repairs.
In the same way, a business that sells both to businesses and consumers is less likely to be impacted by a recession than a business that just sells to businesses. This is because businesses may cut back on spending during a recession, but consumers may still spend on items such as food, clothing, and entertainment.
Diversification can also come from selling to different geographical markets. For example, a business that just sells in the US may be impacted by a recession in the US. But a business that also sells in Europe or Asia may not be impacted as much, because those economies may still be doing well.
The key is to have multiple streams of revenue so that if one stream dries up, you can still rely on the others.
Communicate with your employees and customers
During a recession, it’s important to keep your employees and customers informed about what’s going on with your business. This will help them understand your decisions and know what to expect.
It’s also important to communicate with your suppliers and other business partners. This way, they can be prepared for any changes in your business and can make adjustments accordingly.
Finally, make sure you stay up-to-date on the latest news and developments related to the recession. This will help you make better decisions within your business and ensure that you’re prepared for whatever comes next.
Know the value of money
For companies that don’t have a large portfolio, the best option is to open a line of credit. Additionally, knowing during a downturn the value of money can’t get much lower, you can save money and pay lower interest rates.
A recession can be a difficult time for businesses, but it’s important to remember that it’s just a temporary setback. By taking the right steps, you can ensure that your business survives and thrives during a recession.
Stay positive and don’t give up on your business
The bottom line is that recessions don’t last forever. There will always be ups and downs in the economy, but eventually, things will turn around. So, don’t give up on your business dreams just because of a temporary setback.
If you’re having trouble keeping your business afloat during a recession, reach out to your local Small Business Administration (SBA) office. The SBA offers counseling, training, and financial assistance to small businesses. They can help you weather the storm and get back on your feet.
Historically, when recessions end, there is a strong period of economic growth. Taking a look at previous economic research, in the moments following a financial crisis event like the Great Depression, there have been arguably some of the strongest periods of economic growth to follow.
In the meantime, stay positive and keep moving forward. A recession may be a bump in the road, but it doesn’t have to be the end of your business.
Speak to an experienced tax attorney
A recession can be a difficult time for any business, but there are ways to survive and even thrive during these tough economic periods. By cutting costs, making changes to your business model, and diversifying your revenue streams, you can weather the storm and come out the other side stronger than ever.
Of course, no one knows exactly what will happen during a recession, so it’s important to be prepared for the worst and hope for the best. But if you plan ahead and are willing to make some changes, your business can survive and even thrive during an economic downturn.
At Damiens Law, we are here to provide counsel and guidance during these difficult times.
Contact us today to schedule a consultation. We can help you navigate these uncharted waters and ensure that your business comes out the other side stronger than ever.