Business Planning For a Recession

When you own a business, the threat of a recession can be daunting. Recessions can be difficult if not impossible to predict, but given that they’re a normal part of the economic cycle, it’s best to plan proactively.

Planning for a recession can include regularly evaluating your budget, watching for signs of a worsening market and having a plan in place in the event that economic conditions worsen.

1. Evaluate your budget

While recessions can be unpredictable, it can be helpful to try to estimate how your revenue may be impacted. Doing so can help you consider potential cash-flow issues and prioritize what costs should be kept or cut when needed. This is a vital part of recession planning for businesses of all sizes.

Start by evaluating your budget thoroughly, assessing all annual and monthly costs and looking closely at which expenses are coming up.

Make a list of all your standard and expected expenses over the next 12-month period, and evaluate each individual expense. Is it essential for running your business, including maintaining growth or profitability? Are there lower-cost alternatives if needed?

2. Flesh out your business plan

Your business plan should detail where your company plans to be in the next one-, five- and ten-year periods.

A detailed business plan can help you assess your immediate priorities when you’re preparing for a worsening market, making it easier to determine how to allocate a tighter budget. For example, if long-term growth is important but new customers are less likely to purchase, you may want to invest more into retaining existing clients with proactive customer success efforts.

You can also factor recession-proofing measures into your business plan. Some businesses may try to diversify product offerings or types of clients. A B2B business may try to build client bases in multiple industries.

During COVID-19, for example, the hospitality industry experienced significant financial loss almost overnight and had to slash budgets immediately. Meanwhile, other industries actually saw growth.

3. Work on a safety net

Having a financial safety net can keep your business afloat when revenue drops during a recession. An excess of cash reserves gives you more time to make decisions, including whether or not you need to lay off staff or reduce essential costs.

Ideally, small businesses will have three to six months of standard expenses in cash reserves set aside. Doing this as a general best practice can prepare your business for sudden recessions, as well as unexpected political, economic or market disruptions that can quickly and significantly impact revenue.

4. Build your credit score

Your business’s credit score can directly impact funding options that may be available to you during a recession, including credit or loan limits and associated interest rates. This may be particularly important during a recession, when businesses may increasingly need to rely on loans and credit while lenders are more conservative with approvals.

Many lenders rely on Dun & Bradstreet’s PAYDEX score when reviewing loan or credit applications. The PAYDEX score is a business credit score that focuses heavily on how timely you are when paying vendors. To start building your score now, ensure you’re paying vendors and financial debts on or ahead of a payment’s due date.

5. Make proactive decisions

Some recessions may strike suddenly, but many recessions are preceded by warning signs of a worsening market. These signs may include the following:

• High Volatility Index (VIX) values. Values over 30 signal increased volatility due to increased uncertainty or investor fear.
• Inverted yield curve. This occurs when long-term interest rates drop below short-term interest rates and many investors move their money from short-term to long-term bonds.
• Increasing unemployment rates. When unemployment rates drop by .50 percentage points or more compared to its low during the previous 12-month period, this is considered the start of the recession by the Sahm Recession Indicator, a widely used metric.

When you see signs of a potential recession, consider adjusting financial decisions and cutting costs preemptively. This can help you protect your business’s cash flow and potentially increase your financial safety net before the recession hits.

6. Be flexible

Economic markets fluctuate, so it’s important to consistently track market trends and re-evaluate your plans regularly. You may be preparing for a recession that never quite affects you, or you could find that a recession has an impact on the market for longer than you’d expected.

No two recessions are exactly the same. Multiple causes can trigger recessions, which can result in different recovery periods. So no matter how well you plan, one of the best ways to recession-proof your business is to account for the fact that you may need to pivot.

7. Use the market to your advantage

While economic downturns aren’t desirable for most business revenue, there are advantages to recession markets that businesses can leverage.

During recessions, for example, the Federal Reserve often lowers interest rates significantly. Low-interest business funding may allow small businesses to receive funding that otherwise may not have been an option.

It may also be easier to enact growth strategies during a recession. The cost of running marketing campaigns, for example, may be cheaper if a large number of competitors pause their own campaigns to cut costs. This can make it easier and more cost-effective for your business to reach your target audience and sell more.

Interest rates during a recession

Historically, the Federal Reserve has lowered interest rates during a recession to encourage consumers and businesses to borrow money, increase spending and stimulate the economy.

Our next recession might look a bit different. The Federal Reserve has raised interest rates over the last few years in response to increasing inflation and market demand. This could make it more expensive for businesses to borrow.

Should you get a business loan during a recession?

Some businesses take advantage of a recession’s low interest rates to get a reasonable rate on a business loan. Here are a few reasons why you might consider doing so:

• You want to expand your business. You may be able to take advantage of less expensive advertising to gain new customers and expand into new markets as competitors close their doors. In that case, it might be a good time to leverage financing to invest in marketing, inventory or equipment.
• You have an immediate cash flow gap. During a recession, consumers tend to cut back on spending, which can impact businesses in the short-term. Securing a term loan or line of credit can help your business cover essential business costs even with a temporary dip in sales.
• You want to convert invoices into cash flow. Even if your revenues remain strong, customers may take more time to pay their invoices. Invoice factoring could help turn those invoices into immediate cash flow
• You want to refinance high-cost debt. If you have credit cards or other debts with high interest rates, you could refinance into lower, fixed-rate payments.

Business loans during a recession: Pros and cons

If you’re considering getting a small business loan during a recession, it’s important to consider the advantages and disadvantages.

Here are some pros and cons to consider.