2 Small Business Strategies for Succeeding in a Recession

What’s your strategy?

Between inflation and a possible recession, every business needs a strategy right now. Is it smarter for your business to face economic challenges head-on or would it be wiser to scale back this time around?

Turns out, both approaches have value, although the one you choose may help determine the path your business takes as the economy returns to normal.

Here’s how each works and what the long-term impact can be.

Recession Strategy 1: Scale Back When the Economy Slows

Desiring to pull back on spending is the most common gut instinct and an understandable impulse, especially after the past few years of economic fluctuations.

If you choose this strategy: Select your cuts wisely.

Scaling back has a few pros: you spend less money and retain more of your existing cash reserves. 

But simply not spending as much requires some big picture planning and an understanding of the value each of your current expenses brings to your business. 

1. Start with the easy choices. Can you cut a subscription expense or reduce a travel budget without impacting sales or income? Simple cut backs, for example, dropping the thermostat a few degrees when the team isn’t at work, can make a difference in your cash outflow without heavily impacting your income or sales. But bigger cuts to staffing, benefits, your product line, raw materials, or services, can take a bite out of your profits, too. Any time your cutbacks reduce your output or the quality of the goods and services you create, you may need to readjust your solution. 
2. Target a cash-reserve or expense-threshold goal. Before making broad, sweeping cuts, know your target. Focus on ensuring you have a workable cash reserve and keep your eye on that number. So how much reserve is enough to keep your business safe during a pull-back? You could target a time-period-driven reserve, i.e., three-months’ operating expenses, or a simple threshold of expenses you can comfortably afford each month. Keep close tabs on your cash flow and adjust accordingly.
3. Ask the team for suggestions. You don’t need to make every decision yourself. In fact, asking the team for their suggestions on how to cut costs may help you identify unnecessary expenses that you hadn’t considered previously. Begin with transparency: explain your overall goal in cutting costs and whether these will be permanent or temporary reductions. You can share the expenses you’re considering cutting and ask for feedback or simply ask the team to recommend the cuts they’d take. Using an anonymous submission format can help ensure all team members participate.

Strategic outlook: Businesses that focus on cutbacks are likely to exit a recession with lower levels of debt, although if cutbacks impact product lines or services, reclaiming former market position once the economy returns to normal may present a challenge.

Recession Strategy #2: Push Forward and Grow

What if you take the opposite approach and push your small business forward when everyone else is cutting back? Straying from the more conservative belt-tightening path can result in big rewards for small businesses, although this strategy isn’t without challenges, too.

If you choose this strategy: Stay focused on the long-term outcome.

At first, scaling up your business during tough economic times might sound counterintuitive — cash-flow is always a challenge for small businesses, but it’s compounded when the economy is in flux. However, as economist Max Wolff told us earlier this year, growing strategically as the economy slows can be a smart move. “Because it’s a tough time,” Wolff said, “if you can put together a compelling business plan, it makes a lot of sense to grow. If you’re bigger in the market, you can sometimes get better pricing from your suppliers. You can also pass along more of your price increases to your customers because you have less competition to worry about.”

1. Keep your eye on the end goal. Staying growth-forward allows you to be advantageous in everything from sourcing materials to entering new markets and even mergers and acquisitions. Plus, when you’re growing smartly, you position yourself to enter recovery on top—and that momentum can carry through to boom times, too. The key, however, is to ensure you’re looking at the end-goal but not blindly: you still need to ensure you’re managing your current expenses, too.
2. Watch for opportunities: Pay attention to the market and your competitors. As competition scales back, you may be able to expand to new markets, develop unique partnerships, find bulk pricing on supplies and materials, or even acquire a former competitor.
3. Prepare for the present and near future: One thing to note—continued growth is easier with a little advanced planning, including quick-access funds. “Access to capital is key if you want to be able to keep your lights on and keep a steady bank account through the turbulence,” Wolff pointed out. Look for flexible solutions to help you take advantage of opportunities and to ensure cash flow remains consistent. Lines of credit or business credit cards work well in these situations. Either can help you leap on an unexpectedly good deal on materials, expand into a new territory, launch an in-the-moment process or product, or merge with a competitor. And both act as safety nets and launch pads, although you only pay interest on the portion that you’re using.

Strategic outlook: Thanks to reduced competition and greater market opportunities, businesses that remain focused on growth during economic downturns may hold a stronger market position once the economy returns to normal.

How Long Will the Current Economic Slowdown Last?

When you’re juggling a new normal for your business budget, it can seem like an economic slowdown will never end. But the truth is that modern economies start to recover in an average of 10 months. In recent downturns, we’ve seen everything from 8 to 16 months. 

Which Business Recession Strategy Is Better For You? 

Big businesses frequently have budgets and reserves that can weather economic fluctuations. Smaller businesses, however, don’t always have that luxury. Ultimately, the strategy you adopt for your business during an economic downturn is the one that best fits your industry, market, and business plan. As you review your own plans for the end of the year and beyond, you may also determine that a hybrid of the two strategies—pull back in some areas while also expanding in others—that includes key cutbacks to pave the way for opportunistic expansion is an ideal fit. 

Whichever path you choose, however, shouldn’t be taken lightly. Planning and preparation that helps your business operate with as little disruption as possible is the right solution.

_{The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.}