How to Prepare Your Small Business for an Economic Crisis
The economy grows and shrinks in response to thousands of independent variables. We experience times of tremendous spending and growth, as well as economic downturns where spending freezes and businesses and consumers everywhere suffer the consequences.
An economic downturn could be right around the corner—a possibility no matter how good or bad things look—so do you know what your business will do if spending comes crashing to a halt?
Understanding Where Crises Come From
Stock market “crashes” and economic recessions are a natural part of the ebb and flow of our capitalistic economy, but even leading economists can’t predict the future with any real accuracy. As this RJO Futures article explains, there are some variables that tend to precipitate economic downturns—such as illogically high prices and low-interest rates, forming a kind of bubble—but these alone aren’t enough to definitively conclude when the next crisis will strike. Accordingly, you need to keep your business prepared for anything.
Preparing for an Economic Crisis
How can you protect your business against an economic recession? Obviously, not every business is the same; for example, companies that serve consumer needs, rather than wants, will have an easier time surviving the next crisis. Consumers tend to cut back spending on luxury items and other non-essentials, putting businesses that produce and sell those goods in more serious jeopardy. Still, almost every business will feel the effects of an economic downturn in some ways, and these are the strategies you can use to protect yourself:
1. Diversify your client pool. Your first job is to diversify your client base or customer base. If you have one major client you rely on for your income and that client is hit hard by the recession, you may lose the vast majority of your business. If you have lots of smaller clients, all from different areas, you can afford to lose more than one of them and still survive without much issue. Diversify your pool by seeking different types of relationships with different companies (and target demographics). The more you hedge your bets here, the fewer chances you’ll have to experience the worst parts of the recession.
2. Have an emergency plan. Simply knowing what your company would do in an emergency can spare you the runaround if it actually happens. The word “emergency” here is used loosely; you could categorize an economic emergency as losing one of your top clients, running low on available cash, experiencing a major decline in sales, or being forced to close one of your physical locations. Think things through, and have a game plan ready in case the unexpected happens.
3. Understand the unique demands of your industry. Next, do some research into your industry and competition if you can, and look up what has happened during previous recessions. Is your industry one that’s traditionally hit hard by an economic downturn, or are there key areas of development you could pursue to help your business survive? Your greatest assets here are mentors and other entrepreneurs who have made it through recessions in the past; they’ll have firsthand experience and knowledge of how this could affect your business.
4. Prepare for potential budget cuts. If your revenue crashes or you otherwise start having trouble making ends meet, your only option will be to temporarily decrease spending. In the event of such a crisis, it pays to have a plan made in advance, understanding where you would make budget cuts. Obviously, this isn’t ideal, but you need to know what your necessities are and what you could stand to lose for a few months to a few years. Would you keep your budget cuts to one or two departments, or spread it throughout your organization? Would you cut jobs, or decrease your advertising spend? Think carefully about your priorities here.
5. Have alternate sources of income. You can also hedge your bets against revenue loss by establishing more diverse sources of income—and that goes beyond diversifying your client base. For example, you could start selling advertising on your site or use affiliate links to generate some extra cash. There are countless ways to make passive income through your website, and even more that you could create with new product lines or peripheral sales. The more sources you have, the harder it will be for a recession to crush your business.
If you can follow these strategies proactively, while your business is thriving in economic prosperity, you’ll have a much easier time navigating the next inevitable market crash to come. Remember, fluctuations are a natural part of our economy, and recessions are unavoidable. All you can do is prepare for them the best you can, understand where they come from, and remind yourself that downturns are only temporary.