Small and mid-size businesses (SMBs) are staring down the very real possibility of a global economic recession in the next 12 to 18 months. While 2022 has yet to hit the official recession mark, SMBs are already preparing for the worst.
Recession or not, the combined forces of inflation, global unrest, and rising fuel prices have already left business leaders scrambling to make smart decisions that will help their organizations stay agile through whatever comes next.
So how does a less-than-spectacular economic forecast affect your small business, and what can you do to gird against the worst outcomes and even thrive amid the uncertainty?
How SMBs have weathered recent storms
There’s no sugar coating it. Recent recessions have hit small businesses particularly hard.
The Great Recession in 2008 had a major impact on SMBs, for example. While large banks that were “too big to fail” struggled, that had downstream effects on lending – which hit small and medium-sized enterprises disproportionately hard.
Around 1.8 million small businesses went out of business in the U.S. in the first two years of this recession. Those dependent on large amounts of external financing, like manufacturers, were most likely to be impacted by the 2008 downturn.
The creation of new businesses also stalled during this period, from a peak in 2006 of 715,000 new businesses created to a low of 560,000 in 2010.
Why they bounce back
But as we know, SMBs are fundamentally different from larger enterprises. Recessions hit them differently.
Unlike large, global corporations, smaller businesses don’t typically have the diversity of revenue streams to help them stay afloat early in recessions. Similarly, they don’t always operate on the same quarterly and annual budgeting plans but instead tend to rely more heavily on month-to-month cash flow, which means they feel the hit faster than some larger companies. But the good news is that smaller actions yield bigger results in terms of reforming the company and creating resilience.
What’s more, many SMBs have strong relationships with their customers and communities, a loyal fanbase willing to stick with the business through thick and thin.
In general, SMBs create between half and three-quarters of the jobs in the U.S., so they are an important economic driver in the aggregate. While they might have to make difficult cost-cutting measures during tough times, many of them are also likely to return to investment and growth when the situation improves.
What to do now
In 2019, a sizable 44 percent of small business owners had not taken steps to prepare for a recession. If you’re among those that haven’t, now is the time to take some proactive steps. There are a handful of things that SMBs can do now to help strengthen themselves against a downturn.
First: getting cash in reserves
The same way that you save up in your personal life for an emergency or unexpected time off work, so should your company. It’s best to ensure you have cash in reserves now and are prepared if revenue streams take a hit.
That could also mean taking the time now to secure additional financing from banks and lenders. With interest rates on the rise, this might be trickier than a few months ago. But the best time to look for loans or additional financing is always before you think you need it.
One trend that really took off after the 2008 recession was the rise of crowdfunding, which, depending on your business model, could be a viable option.
Think about products, services, and vendors
A large part of the cost of running a business also comes from vendors and suppliers, so it’s a good time to take a look at the money going out the door and see if you can renegotiate deals or look for different kinds of partners in your business to save money on expenditures.
Removing outdated solutions and consolidating your tech stack are often easy places to make these cuts. When you’re doing this kind of pruning, it’s essential to make sure you have the right digital foundation and the kind of support your IT team really needs.
Finally, while not appropriate for everyone, you can also think about the people and things you’re investing in and get a little more conservative. It might be time to scale back on big investments like new office space or equipment or time to slow down new hiring until more clarity for the next few years is reached.
It’s a great idea to take precautions now to prepare for a downturn, but it isn’t all bad news. In fact, some experts argue that a small recession could even help small and medium businesses in a few ways: by lowering demand for some goods, it could help alleviate skyrocketing inflation. And it could also make the labor market slightly less tight — a good sign for the businesses that have had help wanted signs up in their windows for months.