Preparing A Small Business For Recession
By Brick Business Law P.A.
The economy goes in cycles. For small business owners, we sometimes become so consumed with our day-to-day responsibilities that we miss the big moving parts of the economy. But for anyone that has read a headline or filled their gas tank or tried to order supplies, we have a sense that some things are not right in the world. Higher costs, political turmoil and supply chain snafus all seem to be coalescing to create a potentially ugly near-term future for small businesses. But, that does not mean that we have to be caught off guard or even hurt by the change in the winds.
Brick Business Law P.A., provides legal advice and counsel to small businesses. We are not economists or even financial advisors, but we do know a thing or two about how to help businesses minimize risks, perform best practices and work through problems. With that in mind, here are some practical suggestions for helping prepare your small business for a recession. This is not legal advice. If you want legal advice, talk to your lawyer. If you need a business lawyer, please contact us for a free consultation.
For purposes of providing useful information, let’s assume that your business provides HR services and software to the hospitality industry. Taking this hypothetical business as an example, we apply it to various suggestions below to help demonstrate how our suggestions may be implemented.
1. Diversify Your Suppliers.
If you are reliant on one or just a few suppliers to run your business, it’s time to branch out and find alternative sources. Your current suppliers may not be able to meet demand. They may go out of business. They may have to raise their prices considerably. That does not mean that your business must suffer. Do your homework before the problems show up. Find alternative suppliers. Ask them about discounts, timing, pricing, contractual terms and other substantive issues. Review your contracts. If you have options, then you do not have to be blindsided by your suppliers’ issues.
Taking the example of our HR business, maybe we currently lease all of our employee’s cars from one dealership we’ve worked with for many years. That dealership may suffer supply issues. Or it may not be able to offer competitive lease deals in the future because it has cash flow issues, and we can no longer get the competitive terms we once did. Before the problems hit, we should be identifying competitive dealership, shopping terms, negotiating conditions and making inroads with the right alternative contacts so that we can have alternative options at the ready if needed.
2. Diversify Your Client Base.
A downturn in the economy will likely affect your clients differently. Some may go out of business; others may have to slow down payments or reduce the scope of their relationship with you. Some may look for discounts. Others may thrive. However, you do not want to run your business by having one single type of client (unless you are confident your clients will thrive in a recession), because that situation may leave your business exposed to their problems.
Looking at our HR business, if we are only targeting one type of hospitality business, such as hotels, we may start looking at other businesses that can use our services. Restaurants, bars, night clubs, country clubs or other venues may be able to use our services. Perhaps targeting a more diverse geographical area outside the historical footprint would be advisable. Just like vendors, not all types of clients will have the same response to a downturn. Some categories of clients may be harder hit than others. If this happens, you want to make sure your client base is not comprised solely or primarily of clients who are the hardest hit.
3. Consider Alternative Service/Product Offerings.
As the economy changes, demand for certain services and products will also shift. Some demand will shift from luxury to budget. Some demand will shift from one brand to another. While some may decrease, others may increase. For instance, in the Great Recession, many people shifted from car ownership to ride sharing. This meant that companies like Uber and Lyft (which didn’t exist before) could fill the new demand. In this way it may make sense to think of your small business’ product or service offerings as a basket of stocks – some perform better than others in different conditions – so it’s best to diversify.
For our sample HR business, it may make sense to start to sell form employee handbooks and procedures manuals because clients still need these products but aren’t willing to pay firms to draft custom documents for them. The demand in the recession could be shifting from legal services to outsourced HR document forms. In this case, the HR business might have found a new source of income because of the recessionary environment for competing service from law firms.
4. Capture New Market Share.
A natural tendency of small business owners (and people in general) is to cut costs in difficult times. Of course, it makes sense to watch expenses especially when the external environment is difficult or ambiguous. However, if all your competitors are shrinking back from marketing or service offerings, that may be the best (and cheapest) time to capture market share. Often you can find deals on advertising in this environment. You can also seek out practitioners or competitors who may be willing to join your company or sell their business to you.
So, for our HR Firm, perhaps it was considering a new marketing campaign but decided against doing it due to costs. During a recession it may be a great time to pick up the phone and call to ask for that deal again, but at a discount.
5. Renegotiate with Your Vendors.
For some businesses, you are their customer. They are relying on your continued relationship. If they are seeing some of their customers go out of business or shift to lower cost alternatives, it may be a prime time to strike up a great long-term deal where you can be rewarded for your loyalty. Perhaps it would be good to ask for a price reduction or additional perks for continuing your relationship.
If our HR company outsources its bookkeeping and has used the same vendor for multiple years, it may reach out to its vendor and ask for reduced hourly rate or a price reduction for invoices it pays on time. Any changes should be documented in a written contract between the parties.
6. Invest In Relationships.
For many businesses, there are some key relationships that make it go. The best employees, customers and outside advisors are always valued, but perhaps most importantly in difficult times. Take time to review and identify those people for your small business. Invest your time, attention, and money in them. Ask them if they are doing ok, if you can do anything to help them and let them know you appreciate them. Do an early raise or bonus or send a gift.
For your HR business, it may have several key employees that have some struggles when the economy gets difficult. It should try to identify areas where it can pitch in to help and add value to the relationship, such as offering to pay for childcare when the employee works late. These small gestures will make it less likely that the business will lose that key relationship.
7. Ask For And Give Incentive For Fast Payors.
Economic recessions can often make money move slower throughout the economy. The velocity of money is actual a key economic indicator. The slower it moves often the worse the economy is. This is because businesses, government, consumers, and others are slower to invest, slower to pay, slower to make decisions and, as a result, its more difficult to collect unpaid receivables when the economy is in a recession. Therefore, faster paying clients are even more treasured then normal. If your business relies on collections of accounts receivable, try offering an incentive for fast paying clients. They will appreciate the reward and it’s is more likely you will get paid faster or have less collections to worry about.
As for our HR business, it may make sense for them to shift from a monthly billing model to requesting an initial retainer from new clients and or using a flat fee billing model (both of which require payment before services are rendered). Alternatively, they may want to adjust their customer contracts to add an early pay incentive or a late payment penalty.
8. Use Longer Term Contracts.
When businesses are cutting costs, they will often look to cancel certain ongoing service agreements, such as a marketing contract. If you are the provider of these services and you have a contract that can be cancelled “at will” or within a short time frame, it is very likely that your contract is one that they will consider cancelling in a recessionary environment. Many well-meaning business offer “cancel any time” contracts because they want their customer or clients to feel like they are in control and are always getting a value. The downside of these terms is that it makes it very difficult to run a predictable business based on those relationships. A better approach might be to have an initial longer period and an auto-renew feature or one that builds in a certain amount of time for the provider to replace the departing customer.
Regarding our HR sample business, it may start implementing contracts with its new customers that has a provision to require a 90-day cancellation period from notice. That term will give the business enough time to try to secure replacement business or have a safety net of time to adjust to a larger customer (or multiple customers) terminating.
9. Pay Off Debt And/Or Lock in Credit.
Large debts and small credit lines reduce a business’s flexibility when it has cash flow problems. Cash flow problems are commonplace in recessions because customers are notoriously slower to pay. Often, the ability to get through some lean months depends upon having some credit in place before things go wrong. It also means not carrying a large debt burden which can drain cash flow. Make sure to pay down or pay off the highest interest (or variable interest loans in a rising interest rate environment) first. If you need to sell off assets (such as excess inventory or underused vehicles due to reduced demand), it may make sense to do this earlier ahead of a recessionary environment. Also, if you have relationships with multiple banks and/or have access to lines of credit, it would be good to line those up prior to experiencing any slow-down in the business. Banks usually look at the businesses’ financials prior to approving any lines of credit, so its best to apply when the business’ finances are as strong as possible.
10. Relax And Know That This Is Part Of The Ride.
Owning and managing a business is challenging. It’s challenging when you grow too fast. It’s challenging when things slow down. It will almost never be perfect, but it can still be a fun ride. And if it doesn’t work out, then it doesn’t work out. Most entrepreneurs try (and fail at) multiple businesses before they get to their best one. This may be your one or it may be your steppingstone to the one. Learn a lot, and don’t be too hard on yourself!
