After months of surging costs and labor shortages, businesses face a new potential challenge: recession.
To combat inflation, the Federal Reserve is expected to continue raising its benchmark interbank lending rate, which is likely to push up the cost of capital--and push more people and businesses to retrench. If that happens, you can bet consumer demand will falter and potentially spur a recession.
While this outcome isn't yet set in stone, it's likely enough that businesses need to start preparing as soon as possible, says Jorge A. Guzman, associate professor of business management at Columbia Business School. He adds that early recessionary conditions are already here: Hiring freezes in the tech industry and the dropping values of cryptocurrencies already point to economic downturn. Small businesses, he adds, "need to race ahead of the issues, instead of chasing them as they show up." And do prep for the long haul. "I don't think anybody knows if the effects are going to be felt over six months or two years," says Guzman.
Inflation has already increased costs for many businesses, which has forced owners to turn to cost-cutting strategies like automation and bulk-buying. With the increasing potential for a recession, they'll have to continue looking for ways to cut costs and pay close attention to how consumer demand shifts in coming weeks and months. Here's how small businesses can stay ahead of the game.
Take a hard look at your finances
One of the biggest challenges for businesses over the past two years has been meeting steady consumer demand--a task made difficult by supply chain challenges. Now, as experts predict demand to wane, especially for luxury goods and services, businesses need to plan for tightening finances. "Building a cash reserve is obviously important," says Luke LaHaie, co-founder and co-CEO of Newity, a Chicago-based agency that helps businesses find loan solutions. "I would also look hard at what you spend on accounting, insurance, marketing, and the cost of capital, whether you're paying interest on your credit card versus getting a long-term loan. Then, look at how you can trim those costs."
A recession is likely to weaken the labor market, Guzman adds, which means that businesses may find some monetary relief in the form of decreased labor costs, as more businesses curtail hiring.
What's key, Guzman says, is taking a long-term look at your financial plan and developing a strategy for how your business can operate in a market with reduced consumer demand. "Prudence in preparing for a range of financial outcomes is an important thing for small businesses today," he says.
Reach out for support
Newity focuses on helping other small businesses take advantage of Small Business Administration-backed loans. LaHaie urges businesses to utilize the SBA's various loan programs, which tend to offer lower rates with longer repayment terms, as they can make a significant budgetary difference, especially in a recession. Even if businesses didn't take advantage of Covid-era aid initiatives like the Paycheck Protection Program or Economic Injury Disaster Loans through the SBA earlier in the pandemic, they should look into any current programs for which they might qualify. LaHaie, for instance, owns a gym, which recently got approved for a $50,000 employer retention tax credit.
Don't be afraid to get multiple opinions on credit opportunities, he adds: LaHaie's CPA for his gym first told him that his business wouldn't qualify for a tax credit, but another accounting firm told him differently. "You might find a lot more money than you thought you would when you get different advice," he says.
Look out for unexpected opportunities
Recessions can bring some unexpected benefits, Guzman says--though they depend on several factors. "People might move to businesses that are more focused on value than quality," he says. While inflation has forced price raises across industries for months, as inflation begins to cool, the businesses that can offer the best price for their goods and services are more likely to win out.
Businesses that stay afloat through a recession can also have the opportunity to acquire complementary or competitor businesses. Guzman adds: "Managing a recession can be a big opportunity to position yourself for a huge expansion later on."