3 Tips to Prepare for a Recession!

*5 min read*

Every economic cycle has a slow down period and often times a recession…

Here in the United States, as an entrepreneur or business owner, it is important to understand what a recession is and how it is likely to impact your business over the next 18 months. From this understanding we can review 3 Tips to prepare for a recession. 

First off, we need to understand what a recession is. According to Merriam-Webster, a recession is simply a period of reduced economic activity. 

Diving a step further, we can consult investopedia.com and get a better understanding of recessions and what causes them. According to Investopedia, a recession is a significant, widespread, and prolonged downturn in economic activity. Economists at the National Bureau of Economic Research measure recessions by looking at non farm payrolls, industrial production, and retail sales.

(Check out investiopedia’s definitions here: https://www.investopedia.com/terms/r/recession.asp)

To better visualize, it can be helpful to look at the seasons of our economic cycle. Simply stated, imagine a recession as economic winter, a recovery as economic spring, boom as economic summer, and a slowdown as economic fall. 

The cycle of these seasons vary from season to season, however, on average a full economic cycle tends to take place every 7-10 years.

So, what causes a recession?

While there may be several triggers that can ultimately kick off a recession, the basic formula is as follows: demand peaks and starts to decline, we start to see businesses with an excess of supplies and services that are no longer being consumed at the same rate. Due to this, we tend to see a pullback from businesses in putting goods or services into production. In this reduction, it is not uncommon to see layoffs as fewer workers are necessary for the new demand levels. 

How will this affect your business and what can we do to plan?

The number 1 impact is likely reduced sales. As demand goes down and consumers shift spending habits with a bias towards savings, sales numbers are likely to drop. Reduced sales leads to lower revenue and shrinking profit margins for businesses.

What can you do to stay afloat during an economic recession? 

Here are three simple tips to be prepared and survive the upcoming recession:

• Cash Up - do as much as possible to ensure profits and cash flow is as healthy as possible. Building up a cash reserve today to weather any storm that is to come. The stronger your fundamentals to have cash available, the more choices your business has to adapt and shift. This is where annual planning, budgeting, and forecasting cashflow is crucial in business to build a healthy cash position.
  
• Pivot and/or Look for Opportunity - open your mind to options to adapt your business or pivot to a sector that tends to flourish in economic down turns. Additionally, be on the look out for opportunities. When in a time of struggle and tighter cash positions, not every business will survive. With a strong cash position (see point 1), your business may have an opportunity to buy out a competitor or buy a customer database for pennies on the dollar.
  
• Mindset - Remain optimistic. I know this one may sound a bit less concrete than the previous two, but how you think and your mental approach to an economic slowdown or recession plays a big role in your ability to keep clear focus on what is important and keep the business moving forward. 

At the end of the day, profitability and your ability to build up cash reserves are going to be critical. This takes planning.

If you haven’t started the process, dedicate the time over the next couple weeks to build your 2023 annual plan for your business. Map out what the budget will look like and set very realistic sales targets. Identify where your gaps in cash flow will be and prepare NOW on how you will manage through them.