At the core of the Entrepreneurs' Organization (EO) is a commitment to helping entrepreneurs learn and grow in every stage of business. One business best practice is to prepare for bad times during good ones, so that your company has adequate funding to weather any economic storm. To address this topic, we tapped third-generation entrepreneur Eyal Lifshitz, founder and CEO of BlueVine, which provides small businesses with quick and easy access to working capital. Here's what he shared:
Small businesses form the backbone of the U.S. economy, playing a critical role in economic growth and job creation. In 2018 alone, more than 30 million small businesses generated 1.9 million new jobs, according to the U.S. Small Business Administration.
But we're experiencing a time of uncertainty with heightened speculation that we may be on the brink of another economic downturn. Based on what happened during the last recession a decade ago, it's in every business owner's best interest to think ahead and prepare.
I began working in venture capital shortly after the Great Recession of 2007-2009. I saw how many businesses struggled through the hard times. Some didn't make it, but many others were able to weather the storm and emerge stronger and more stable than ever.
Here are four ways to prepare your small business for another downturn:
1. Focus on employees.
Employees are a critical part of your company. Some small businesses even consider their employees as family. A cohesive team is crucial for any business operating in or trying to survive a downturn. Communicating clearly about the state of the company and of your industry can help your team prepare for a downturn.
How you build your team and expand is also critical. Hire judiciously. While it's tempting to expand headcount when times are good, hiring additional employees must always be based on a clear business strategy. One of the toughest things business owners had to endure during the Great Recession was letting good, hardworking people go. Not only are layoffs painful for employees, but also they create disruptions and can damage company morale.
2. Secure capital well before it's needed.
Remember the golden rule of business financing: The best time to look for capital is when you don't need the money.
Financing becomes a considerable challenge during a downturn when access to capital can essentially dry up for small business owners. During the Great Recession, traditional banks stopped lending to small businesses, forcing some to dramatically scale back operations or even file for bankruptcy.
That's why having access to working capital is key to navigating through a downturn. And the best time to secure financing is before a downturn hits. When your business and the economy are in good shape is the ideal time to lock down a business line of credit or an invoice financing line. Doing so becomes tougher when the economy begins slowing down and financing gets tighter.
3. Thinking about a big investment? Think again.
New equipment, renovations, a bigger office―all may be wise investments when times are good. After all, as a small business owner, why wouldn't you do everything in your power to grow your company?
It's tempting to make big, expensive changes when you're cash-flow positive. But amid speculation of another downturn, business owners should proceed with caution. Evaluate every planned major expense carefully to make sure the return on that investment is sound.
This is a time for every business owner to think ahead and avoid overreaching. Remember, the best way to stay afloat through tough times will be to prepare while you're prosperous.
4. Strategize with partners and suppliers.
As you prepare for a possible downturn, keep in mind that a recession will also impact your suppliers and vendors. Explore alternative providers in case your partners find themselves unable to work with you and serve your needs.
Reach out to your network of suppliers, vendors and partners to discern whether they're prepared for a possible downturn. While it's a best practice to identify alternative vendors, it's smart to maintain your long-term relationships with providers. Consider the rumors of a potential downturn as an opportunity to exchange ideas on how to prepare for hard times so that you're both positioned to survive any difficult times that may lay ahead.