You’ve heard this before, but it’s true: Small businesses are the backbone of our economy. Though small businesses are small, they are mighty. They generate 44% of economic activity in the U.S. And small businesses are extremely vulnerable to economic recession and disaster—25% don’t have enough cash to make it through a two-week downturn.
If your business has ever felt unprepared for tough times, know that you’re not alone. Even the most robust business planning likely doesn’t include preparing for disruptive events like a global pandemic.
Whether your business is struggling because it’s been forced to close or your regular stream of customers has vanished, cash flow is most certainly top-of-mind. How can you stay afloat? This guide will help you prepare for a recession, hopefully without panicking.
Cash flow is king, but especially during a recession. During good times, cash flow may not have been your priority. With enough money coming in, you probably didn’t have to watch your books too closely to ensure you didn’t run out of money.
A lack of focus on your cash flow can make tough times scary. According to a survey conducted by JP Morgan Chase, the average small business holds 27 cash buffer days in reserve. That means that an average business can continue to meet all of its cash outflows (rent, labor, utilities, etc.) without earning any money for 27 days. But of course not every business falls within this average.
Because cash is so important to keeping a business afloat during tough times, including a recession, do your best to make whatever cash reserves you have last as long as possible. Some key things to do include:
While your primary business may be suffering, is there an opportunity to expand to serve customers in a different way? Breweries in Oregon, left without the ability to serve customers onsite during the pandemic, started home delivery services. Their loyal fans get craft brews that they can’t find in the grocery stores.
Maybe you’re a caterer who has seen business dry up with event cancellations. Could you create a food delivery service packing people’s refrigerators full of healthy staples like gourmet salads, soups, and daily smoothies?
Or perhaps you’re a personal trainer and you have to stop seeing clients. You might offer discounted virtual sessions to clients.
We’ve also seen many small businesses offer gift cards to their loyal customers as a way of getting cash in their pockets sooner (though, granted, they’ll still owe services for those advances down the road). And companies are helping to make this easy. For example, Shopify is making physical and digital gift cards available for all businesses they support.
These ideas don’t have to be a long-term solution—think about how you can take the resources you have right now and meet the needs of the people in your community.
The best time to look at loans and lines of credit is before you need them. Even if you think you can weather this storm and recession without borrowing money, take the time to learn your options now. If you don’t have an immediate need for money, or a set amount that you need, a flexible option like a revolving line of credit might be a good choice.
While there is still plenty of access to traditional capital, there are also disaster relief options that are being updated daily. These include:
This FreshBooks article provides a more extensive listing of resources and is updated daily.
If you have business insurance, now is a great time to break out your policy. One thing to specifically check for is a business interruption policy. Business interruption insurance is designed to protect businesses from the loss of income resulting from a disaster.
If you do have business interruption insurance, it’s time to dig into the details. Your plan may specifically say it won’t cover economic losses related to a virus or recession, but it’s worth checking.
Above all, keep in communication with your customers. You’ve worked to develop a business based on their trust. Don’t leave them guessing. Communicate when you’re closed, when you expect to reopen and any additional offerings you have. Tell them how you’re here to support them and how they can help to support you.
In a time where so many people are afraid of what’s next (including you), connections matter.
Your business matters to you, to your customers, and to the economy. While no one knows what’s coming next, guiding your business through tough times can leave you stronger on the other side.