Guide to Recession Planning for Small Business Owners

Recession planning should be a standard operating procedure for all small businesses. Recessions can strike quickly and you must be prepared to act. However, with the proper planning and the right mindset, you can make your small business recession proof.

In this guide, we’ll discuss

• Cultivating a recession-proof mindset
• How recessions impact small businesses
• Tactics to prepare for a recession
• Tactics to navigate a recession
• Tactics to recover from a recession

The purpose of this guide is to equip business owners with a blueprint to recession-proof their businesses.

Cultivating a recession-proof mindset

There have been 13 economic recessions since World War II (including the Covid-19 pandemic recession and the Great Recession) and there will be more. Recessions or economic downturns are part of the economic cycle so we must prepare for them. Sometimes we see the writing on the wall and can reasonably plan for a recession. But other times recessions can be unpredictable and hit hard and fast. Still fresh in our memories, the Covid-19 pandemic showed us firsthand how recessions can be unpredictable. The best course of action is to always be prepared. Recessions are inevitable and acknowledging this is the first step to planning for them.

Not waiting until a recession hits is part of having a recession proof mindset. The idea is to have your business always prepared so you can navigate the recession intentionally.

How recessions impact small businesses

Recessions impact all businesses and can have a cascading effect on the economy. Small businesses can get hit particularly hard because cash flow is typically already tight. During recessions, even the most loyal customer base (who are also adjusting to the recession) might delay payments, slow down purchases, stop purchases, or pause/cancel services which impacts revenue and cash flow. This can have a huge and sudden impact on the ability of a small business to operate and the small business might have to pause or cancel some of its orders. Having a plan in place before a recession hits, and enacting it as soon as possible, is the key to surviving them and thriving after.

Tactics to prepare for a recession

The goal is to make your small business recession-proof. Without a plan, business owners might react to the recession by going into survival mode and making sudden and deep cuts. Cutting too deep can negatively impact a business when it's coming out of a recession. Acting defensively instead of implementing the plan that has already been thought through can be a problem.

The idea with these recession-proofing tactics is to have them in place before a recession hits. In other words, have your recession business plan ready to go.

Implementing and embracing these ideas is all part of cultivating a recession-proof mindset. Consider how each might apply to your small business:

• Emergency cash fund: Emergency cash reserves can help your business navigate cash flow pressures during a recession. For example, if your business is generally healthy, but a customer's payment is late because they are also navigating the recession, tap your emergency fund to continue to operate and replenish it when the customer's payment goes through.
• Business credit cards: A business credit card can keep your small business operating in the short term during a recession. In addition to being able to spend on essential expenses, you also have the option of using your business card for a cash advance. Make sure you understand the fees (typically high) associated with cash advances. You can open a business credit card and just not use it until you have to. In other words, get your business credit card before the recession so there are no delays if you have to use it.
• Open a business line of credit: business line of credit is a flexible way to manage cash flow during a recession. Using a business line of credit will have more favorable interest rates than a business credit card and will give you a longer period to pay back the debt. Similar to a business credit card, you can open a line of credit before the recession so you have immediate access to capital if you need it.
• Deleverage your balance sheet: Existing debt obligations can make navigating a recession harder if cash flow suddenly dries up. Tapping other business financing options might be harder in a recession (we will cover this more later) if you already have debt.
• Continuously review and optimize cash flow: Maintain a clear picture of cash flow. For example, employee salaries, rent, operating expenses, taxes, accounts payable, insurance, utilities, marketing, and costs associated with fulfilling orders are some expenses needed to operate a business that impacts cash flow. Reviewing this data and seeing where you can make improvements will help. If cash flow optimization and financial management are not your strong suits as a business owner, consider reaching out to a CPA. They can assist you with cash flow and recession business models.
• Messaging to customers: Knowing you will have to enact some of the tactics we discuss in the next section, how are you going to communicate those changes to your current customers? For example, if existing customers are used to doing business with you a certain way (for example, net 60 payment terms), but now you need cash sooner and adjust the payment terms, you will need to communicate that change.
• Plan with local business leaders: Speak with other business leaders to potentially form partnerships. For example, a restaurant might be able to negotiate special recession pricing with food vendors so both businesses can keep operating during the recession.
• Diversify revenue streams: Start working on alternative revenue streams. Can your business begin to generate revenue from outside of its core economic activity? Diversifying revenue streams can help mitigate risk, similar to a well-diversified stock market portfolio.

In addition to these pre-recession tactics, another way to prepare is to know your options to navigate through a recession.

Tactics to navigate a recession

Having a cost-cutting plan in place before a recession happens is crucial. At the very least, think through how you would cut costs in a recession if cash flows suddenly dries up. Having several cash flow forecasts in place is a sound business strategy because it forces you to think through multiple scenarios based on how bad the recession is. Below is a list of ways small businesses can cut expenses during a recession. Consider how each might apply to your business:

• Staffing Reductions: Salaries are typically the highest expense contributor for a small business. This is not ideal because people will lose their jobs, but layoffs might be essential to keep a small business afloat. When the recession is over and business picks up again, consider having a certain percentage of your staff as independent contractors and/or vendors instead of full-time employees. This will make your workforce more flexible, allow you to scale up or scale down more easily, and save on expenses like health insurance and retirement plans. This is also an opportunity to review all of the work that your staff is doing. Are there opportunities to automate some of their labor? Are there opportunities for the business operator to do some of their work?
• Reduce marketing spend: During a recession, you can cut your marketing spend to reduce expenses because your target customers might pause their spending. A lot of marketing work can be done by the small business operator. While you might have to cut ad spend, there are a lot of valuable, demand-generating marketing activities that can be done like social media. Platforms like LinkedIn or Meta’s suite of apps which include Facebook and Instagram can be critical tools to help your small business save money and thrive during a recession.

You will also need to adjust your marketing strategy. Your customers might be facing tough times due to the challenging economic climate so you should consider adjusting your marketing efforts. Adjust your message to talk about the savings and value that your products or services provide.

• Review your vendors: During a slowdown, take a critical look at your vendors and what you are spending with each. Which vendors can you put on pause, which should you look to replace to find better pricing, or which can be cut altogether? The goal is to be able to continue to operate with just the essentials.
• Review your office space: If you are paying for office space you can consider going 100% remote or joining a co-working space to save on real estate costs. A subscription to Zoom is going to be much more cost-effective than an office space. Unless you are operating a business that requires a physical footprint (i.e., restaurant, farm, etc), consider going virtual.
• Eliminate unnecessary perks: Free lunches might have to stop during a recession. While perks are important to attract and retain talent, employees will understand that during a recession the Friday-night happy hour paid for by the company will have to be canceled.
• Reduce business travel: Instead of getting on an airplane, checking into a hotel, and paying for meals on a business trip, schedule a virtual meeting instead. Your colleagues or vendors will understand that a recession is happening and you are temporarily cutting costs.
• Reduce general expenditures: review your common, everyday business expenses and see what can be reduced. The goal is to be able to continue to operate with just the essentials. Review digital memberships to publications, software subscriptions, streaming services, etc. What can be put on pause, what can be downgraded to a lower membership level, and what can be canceled?
• Pause the roll-out of new products and services: New products and services in your pipeline should be placed on hold until you have more clarity on the recession. Consider the Covid-19 pandemic which essentially changed our worldview and kicked off an entirely new way to live and work. Your new initiatives pre-recession might be rendered irrelevant and obsolete coming out of the recession.
• Take out a loan: You can take out a loan during a recession, but it might be harder. Typically small businesses need to show cash flow, revenue, good credit, and profitability to a lender to take out a small business loan. During a recession, these things might be in bad shape so you might not be approved or will be offered a non-competitive rate.

The U.S. small business administration (SBA) has a range of business financing options that will be available during a recession. However, the SBA will likely take a defensive posture during the recession as well and adjust its rates and qualifications accordingly. The SBA can also create specialty loans to meet the needs of the recession. For example, the SBA launched several COVID-19 relief options during that pandemic.

As an entrepreneur, you need to be diligent about your cash flow and how you are spending your money. Understand your monthly fixed costs, and variable costs, and review your spending habits frequently to improve your bottom line. This motion will allow you to create a contingency plan to outline what expenses can be cut should cash flow gets tight.

The other goal of these tactics is to convert fixed costs to variable costs. With more variable costs, your small business is more elastic and can more easily adjust to economic recessions. Startups need to be nimble and flexible.

How Recessions Impact Interest Rates

During a recession, the Federal Reserve will be adjusting interest rates. This might mean lower rates on loans for a time, but if rates are too low for too long it can cause inflation. In this scenario, the Federal Reserve will rapidly increase rates to combat inflation, while trying to not cause another recession. It is a balancing act, but interest rates might be all over the place during a recession which causes uncertainty. The reaction from the Federal Reserve depends on what caused the recession but they will constantly be looking at data and will make adjustments accordingly.

Tactics to recover from a recession

When the recession is over and your business and the economy at large get back on track, it’s time to review what happened. For example, the Covid-19 pandemic caused permanent changes in consumer behavior and how we work. Essentially it accelerated digital adoption and pushed a larger segment of our population online. Many are now ordering food and groceries with an app and calling into work meetings from home via Zoom. Continue to cultivate your recession-proof mindset by understanding that the world might be a different place and you need to adapt to it:

Analyze how your business performed: You now have to look at your small business through the lens of a new normal. Where did your plan succeed and where did your plan fail? Review the metrics, look at the data, and see where you need to make adjustments.

Invest in tools and technology: What tools and technology have emerged that can help your business operate in the new post-recession world? Quickly establishing your business on the new platforms your customers are using can give you an edge.

Take market share: The tough reality is that not all small businesses survive recessions. Hopefully, your preparation will put your business in a position of strength which will allow you to take market share, acquire new business, and a new client base.

Operational adjustments: Consider how your business operated during the recession based on the tactics that you implemented to help navigate it. Consider if there are any adjustments you need to make to how your business operates.

Marketing adjustments: The products and services that you were selling pre-recession might need to adjust post-recession. With that, your marketing messaging and the platforms you advertise on might need to adjust too. Also, if you tweaked your recession messaging to reflect value and savings, you likely need to shift this too.

Start preparing for the next one: Think of this process as one that is continuously adjusting and improving. For example, if you prepare for a recession, you enact your plan when it hits, your review after the recession, you make adjustments to your plan for the next recession, etc.

Summary

Given that recessions can emerge quickly, preparing for them should be part of a business’s standard operating procedure. Making your small business recession-proof takes proper planning and the right mindset. Leveraging the information in this guide will help define your strategies to prepare for, navigate through, and recover from recessions. Additionally, strengthening your position with capital can help ease the strain recessions put on your business. For additional information on how to get access to financing, contact Biz2Credit today.

FAQs

What is tax planning for new business?

Tax planning for businesses involves strategically organizing their finances to legally minimize tax obligations. This process involves analyzing costs, profits, operations, investments, assets, and liabilities to optimize the overall tax burden. By structuring finances wisely, businesses can maximize savings, improve cash flow, and stay compliant with tax regulations while making the most of available deductions and incentives. 

How to get the most back on business taxes?

To get a tax refund for your business, you must pay more yearly taxes than your actual tax liability at year-end. This applies whether you run a pass-through business (where profits are reported on your tax return) or a corporation. It’s about balancing your estimated payments to ensure you’re not underpaying or overpaying too much.

How to prepare for taxes for a small business?

Prepare your books for tax season by keeping track of every business transaction from the tax year and categorizing them properly. Make sure your records align with your bank statements by reconciling your accounts. Generate key financial statements to understand your business’s financial health clearly. Gather all receipts and invoices to support your deductions and ensure accurate reporting. Lastly, don’t forget to file the necessary tax forms for your contractors and employees to comply with IRS requirements. Proper preparation can make tax time smoother and help you avoid last-minute stress.

How to reduce your small business tax bill?

You can use several strategies to reduce your tax bill as a small business owner. One option is paying for health insurance, which can be a deductible expense. Saving for retirement helps secure your future and allows you to take advantage of tax-deferred growth. You can also claim the Qualified Business Income (QBI) deduction, which can lower your taxable income. If you use your car for business purposes, keep track of mileage and expenses, as they may be deductible. Depreciating business assets over time can also provide valuable deductions. If you have a home office, you might be eligible for the home office deduction, which can help offset some of your business expenses. Lastly, don’t overlook financing costs, as interest on business loans can also be deducted. By leveraging these strategies, you can lower your overall tax burden while reinvesting in your business’s growth.

What business expenses am I missing?

It's easy to overlook certain expenses when preparing your taxes, especially when they seem small or are spread across multiple accounts. Business-related credit card interest, bank fees, charitable contributions, and taxes are often costs that can slip through the cracks. However, these expenses can add up over time, and missing them could mean leaving money on the table. Review all your accounts and include these deductions to ensure you're not overpaying. Every little bit counts when reducing your overall tax bill, so don't forget to account for these seemingly minor expenses.

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