Since we all struggle through the COVID-19 recession or, let's say the COVID-19 small business crisis, it's natural to consider the future and what it might bring. The economy, like business, never remains still and is either increasing or shrinking. There will undoubtedly be booms and busts in the future. While the present situation is still ongoing in many aspects, it considers how you might face future economic developments after an economic recession. Many firms have suffered financially due to stay-at-home orders and business closures in the last two years. After reading this insightful article, you can consider should you grow your small business in a recession or not.
Recessions or economic downturns are usually depicted as transient occurrences. Moreover, as a massive amount of economic literature demonstrates, the effects of declining earnings, high unemployment, and slower economic growth can be long-term. Loss of employment and declining finances, for example, can cause families to postpone or forego their children's college education. Credit markets that are frozen and down consumer spending can stifle the growth of otherwise thriving small enterprises. Larger corporations may postpone or cut spending.
When economies collapse, agencies do not farewell. When clients' margins contract and demand plummets, marketing may be the first victim in these tough times. Ad expenditure in the United States fell by 12% after the financial crisis of 2008.
Furthermore, extensive evidence shows that corporations should keep (or even increase) marketing spending during a recession. During the Economic Downturn of 2009, Amazon's business practices, for example, saw a 28 percent increase in sales.
According to one analysis of the 1981-82 recession, businesses that marketed vigorously increased their sales by 256 percent by 1985.
This may seem counterintuitive to popular belief, yet downturns are ideal for advertising for three reasons:
Don't panic if you ever see an economic downturn coming; it's not all inherently bad. On the contrary, perhaps you and your clients will benefit in the long run if you can persuade yourself to continue marketing.
However, the period following an economic crisis necessitates a long-term strategy. To properly "recession-proof" your organization, you'll have to have a long-term damage control strategy that decouples it from market conditions.
In a perfect world, you should continue to spend wisely during downturns to gain market share from your rivals.
However, when demand falls, businesses worry and remove funding in the actual world. When that happens, you'll need a plan, which I'll provide below.
There are three dangers to consider at the onset of each economic downturn:
How well-positioned are you to weather a downturn in the economy? How many funds do you have in the bank for a month? What are your terms of payment? How much money do you owe to your creditors? What do your clients and partners owe you?
Answering these questions is crucial. Some organizations are recession-proof merely as they have enough funds to weather a downturn. Later, I'll explain how to create such businesses and perhaps why should you grow your small business in a recession.
Examine your client list as well. For example, is one client responsible for a disproportionately large share of your revenue? Again, you'll need to go all-out to save this client in this instance.
What are the possibilities that the recession will have an impact on your clients? Do all of your clients work in the same industry? Or are they dispersed throughout several industries? How resilient is each industry to a downturn?
Demand drops across the board during an economic collapse, but some businesses fare better than others. For example, if you work largely with doctors, you may find that supply remains consistent (or even increases) during a recession.
At the first indication of economic difficulty, some of your clientele will pack their belongings and flee. Others may be willing to put up with it for years.
As a result, step two is to sift through your client list. Consider the following:
The latter is especially significant. Even if you're losing money, it's sometimes worth struggling to keep a key client. The tough days don't continue forever, but missing a key client can be difficult to recover from.
Starting with a decent baseline plan that anticipates your rough estimate for how everything will go in the future is the foundation of any mitigation strategies. Don't worry, and this isn't the time to speculate on future downturns. Instead, this strategy should aim to maintain the status quo. It should be able to forecast the growth you're hoping for, barring any unexpected economic developments.
This phase of your preparations does not necessitate a comprehensive, formal company strategy. Simply concentrate on creating a financial model that comprises a profit and loss statement, cash flow statement, and balance sheet. Ideally, your projection should be integrated, with changes in sales in your automatically affecting your other financial statements. Having a forecasting system is beneficial.
With your financial prediction in place, you can play around with various financial scenarios to observe how your funds and revenues react in various scenarios. For example, slowing down the existing business and individual revenue streams should be tried. Then, consider how you might respond to a decline in revenue in each situation by anticipating a reduction in costs.
What expenses can you simply reduce? How much money will it take to stay in business? Working through several situations will assist you in determining what changes you may need to implement in your organization to keep it sustainable.
Keep a close eye on your business expenses or cash flow as you experiment with various financial scenarios. Are you able to retain adequate money in the bank in various circumstances? What adjustments do you need to make to your financial projections to maintain your cash flow stable? Having interconnected financial projections comes in handy, as changes to one area of your forecast will automatically affect the rest of your forecast.
It's also important to concentrate on your existing cash flow and develop solid habits while things are going smoothly, in parallel to dealing with hypothetical cash flow scenarios. For example, to have stable business growth spend quality time confirming that your clients pay you promptly and developing processes to manage your accounts receivable.
It's not always straightforward for firms to build a cash reserve or "rainy day fund." Usually, firms reinvest a large portion of their profits back into the company to fund future expansion. Consider taking out a business loan to serve as a cash reserve in this situation. Ideally, you won't use this cash cushion until you need it, and it will cost your company nothing to keep it up to date, with fees and interest only accruing when you draw from it.
Numerous new business models could be effective in normal circumstances but cannot do so because of a lack of credit or demand.
Tying certain expenditures to revenue is a good budgeting method. This implies that you predict advertising spending as a revenue percentage of sales rather than setting aside a fixed budget for marketing. If sales start to drop, you can use this strategy to commit to spending in control or automatically increase the budget if sales are stronger than planned.
This strategy applies mostly to marketing. Most cash outflows (as opposed to "fixed expenses" like rent) can be related to revenue to make budgeting easier.
Even if you've gone through all of the above processes and have a solid financial projection with many possibilities, it won't help you much until you evaluate your plan regularly and monitor your results against it.
The simplest method to achieve this is using a financial statement dashboard, which allows you to quickly generate reports and determine if you're on track to meet your sales targets while staying within your capital expenditure. Then, organize a monthly feedback session to look through your figures and adjust your projection based on how your company is doing.
You should accelerate your review cycle and examine your data more consistently during a financial crisis or when your firm has considerable upheaval and unpredictability. As with the other suggestions on this list, it's ideal for putting these procedures in place when things are going well, so you don't have to rush to create a good verification system when you've got a lot on your plate.
An excellent technique for dealing with business downturns is diversification. For example, during the coronavirus outbreak, many rising restaurants ventured into the delivery business and switched to steeper discounts, attracting a different client base than they had previously.
Ready meals and other family-eating solutions are now available at many establishments. Many of these eateries have preserved these fresh items as they returned since the expanded lines of business broadened their offers and helped boost their potential revenue.
You should look into different price possibilities when you consider offering your services and products to different customers than you have previously served. Different selling strategies might help you get new consumers and make your services and products more accessible to consumers who are afraid to commit during difficult times.
You may, for example, try renting items rather than selling them. You might try selling smaller, less expensive alternatives to your service, or you could preconfigure services and sell them separately. Rather than a one-time purchase, a subscription plan is another alternative for clients who want to save money upfront. The idea is to cut or eradicate expenses that have little or no impact on your business operations.
Relationships are more crucial than ever during a recession. It will be much simpler whenever you need to postpone a rent check or pay it off after some time to the supplier if you have developed trustworthy ties. Work to establish those ties before a crisis strikes, much like some of the other suggestions above, so it's simpler to ask for a favor and a recovery package when you need them.
Don't forget about your customer relationships. When you build strong relationships in the good times, it will be easier to keep them with you when things are rough. After all, people are people, and they will engage with companies they trust completely.
Recessions are uncommon occurrences, and countries have fiscal and monetary policy tools to aid recovery. However, even in the absence of official support, economies tend to rebound once the imbalances that caused the recession are addressed.
Recession risk indicators like high operating leverage and reliance on economic momentum can convert into benefits for growth and small-cap businesses that have gotten undervalued as the recovery takes root.
Rapid growth for uncertainty makes mortgage-backed securities and corporate debt of all grades more appealing in fixed-income markets. As the risk premium for such debt falls, the return spreads for similar-maturity US bonds. As a result, bond yields tend to fall in value, causing yields to rise. That means that even if riskier debt outperforms treasuries, it may lose value in real numbers.
Higher economic activity raises demand for raw resources, so a return to growth is usually good news for commodities. But keep in mind that resources are handled worldwide, and the US market doesn't just drive the desire for these resources.
Small companies lack appropriate access to cash and broadband connectivity, and they are disproportionately clustered in industries that are most susceptible to the pandemic's consequences.
A small business consultant can ensure you're timing the market with all his experience and knowledge of additional resources. Any entrepreneurial activity to attain a progressive company becomes easy with a knowledgeable consultancy.
Recessions have a long-term effect. As a result, the costs of battling recessions should be viewed as long-term investments. Unfortunately, however, not every firm sees it in this light, which is sad because business opportunities proliferate throughout a downturn.
It's difficult to run a small business throughout a recession. A recession, on the other hand, does not have to mark the end.
To adapt to the new reality, your small business will have to be flexible and adaptable. You can recession-proof your firm and emerge stronger on the other end if you plan ahead, implement properly, and stay focused.
Leading your company through a big economic recession or a shift in the business climate is difficult. That is without a doubt the case. However, you can make things a lot easier for yourself by planning ahead and putting in place the necessary systems. Substantial improvements in your business are always difficult, but if you stay on your feet and look for new chances, your company will prosper and is why should you grow your small business in a recession.
Yes, a business can grow in a recession. In fact, during a recession the competitors will be unable to continue and this may create even more opportunity for an ambitious business owner.
Most stable/ value based businesses tend to grow during a recession. As an example people will always require plumbers and electricians. So, it's safe to say that these businesses have room to scale.
Most small businesses will survive a minor recession. However, if the minor were to turn into a major recession, there would be significant issues for many small businesses.
Ronald Osborne is an experienced business coach. With over ten years of experience, an MBA specializing in Finance, and several multimillion-dollar contracts. Ronald has been able to help large telecommunication companies, law firms, trade businesses, and everyday business owners improve their business and take it to the next level.
