Small businesses tend to suffer during recessions — Read this guide for strategies to survive an economic downturn as a business and thrive as well.
From rising costs to diminished customer spending, staying afloat as a small business during a recession is difficult.
Thankfully, there are several strategies you can adopt to survive and even thrive during an economic downturn.
Today we’ll explore 8 of these strategies, some of which include managing costs, exploring new marketing strategies, and diversifying business income streams.
By the end, you’ll have practical takeaways you can apply as a black small business owner.
Table of Contents:
- How Do Recessions Affect Small Businesses?
- How To Be Recession-proof: 8 Ways To Combat A Recession As A Small Business
- Final Takeaways On Beating Recessions As A Small Business
How Do Recessions Affect Small Businesses?
When a recession occurs, small businesses are usually more affected than larger companies because they have smaller margins and less flexibility or leverage.
This causes small businesses not to have the bandwidth to cover costs as customer spending reduces.
Small businesses also tend to have fewer financing options and may rely on personal savings to keep business afloat. Part of why this happens is that banks become more cautious and strict with lending money during a recession, making it more difficult for small businesses to access capital.
Remember that your customers feel the recession as well. If your business is in the B2C space, customers are more likely to cut back on purchases they consider non-essential.
This results in less demand for products and services and is bad news if your business relies on a high volume of low-cost sales.
All these issues can seem overwhelming, but they’re avoidable or at least less problematic when you can combat them.
And the best time to combat a recession is before it even arrives.
Let’s shift gears to the 8 strategies to help your small business bypass problems caused by an economic slump.
How To Be Recession-proof: 8 Ways To Combat A Recession As A Small Business
1. Carefully Manages Costs
Track your business expenses closely to pinpoint where you’re losing money. This practice is even more critical during economic uncertainty.
Here are key areas to monitor spending:
- Software/business tools
- Staff
- Rent/utilities
- Marketing
- Inventory
It’s important to keep your most essential expenses and cut the ones that don’t add value. This means software subscriptions that aren’t used consistently or that lack an ROI must be gone.
Tim Abercrombie of Abercrombie and Associates in Silver Spring advises: “We recommend that our clients take a look at current spending levels and cut 5 to 10% of costs based upon the projections for the new fiscal year. Many times, when you look for areas to reduce cost outside of personnel you will find areas that can be reduced without impacting productivity (phone service, consultants, supplies, etc.).”
If you’re operating a physical product business, order the right inventory volume, especially as buyer demand decreases. The last thing you want is too much product at the wrong time.
Variable expenses like your marketing can also be evaluated. Sometimes, this may mean you need to pivot your strategy to a more cost-conscious game plan or cut back spending entirely.
2. Prioritize Cash flow
One of the essential things you can do as a small business during a recession is to prioritize cash flow.
This means taking an inventory of how well you can cover your expenses with revenue.
Cash flow analysis also means looking into how quickly you’re getting payments. If you’re experiencing many delayed payments, it can cause problems when monthly expenses are due.
Here are some best practices for better cash flow:
- Implement automatic billing
- Calculate profit margin as you make more or fewer sales
- Use business accounting tools like Quickbooks to monitor cashflow at a glance
- Set and clear cash flow management practices
3. Explore New Marketing Strategies
Consumers and businesses, for that matter, are more price-conscious during a recession. Because of this, the way you market may have to change, more specifically, your offer.
For instance, offering discounts is a popular form of landing more customers during a recession since people have less capital to spend. Once you get that customer, you can nurture that relationship and have them repeatedly buy from your business and add value to it.
One of the most common ways of doing this is:
- Sending emails to your email list of customers and staying top of mind
- Offering additional future discounts with expiration dates
- Providing an outstanding product or service
- Asking for customer referrals
- Implementing loyalty programs
Depending on your business model, discounts aren’t always the answer. Sometimes it’s about increasing the value of your product or service to justify a higher price point (this is especially the case if you’re in B2B.)
Adjusting your marketing can also mean changing the platforms you use.
If you’re running paid advertising, some ad platform costs may cut into your margins, making it difficult to stay profitable.
4. Build Cash Reserves
Cash reserves are essential, and even more so during an economic downturn.
If sales begin to slow down, having cash reserves help you get through the tough months.
It’s also a better alternative to business financing or loans since you won’t have to make interest payments.
You can build these cash reserves now by saving profits and depositing them into a separate business bank account. Building your cash reserves little by little can snowball as time goes on, bringing you peace of mind when a recession begins.
5. Increase Customer Retention
The easiest way to increase revenue during an economic slump is to ensure that your current customers buy again.
Evidence shows repeat customers spend about 67% more than new customers.
And the best part is that it’s easier to reach your current customers for free than new customers.
Your current customers already have familiarity with your business, making them the perfect starting point for growing revenue during a recession.
But how is this done?
Start by providing excellent customer service.
Treat your customer’s needs immediately and make them feel valued. Go above and beyond so that they feel you’re your niche’s go-to business or expert.
You can also implement the previous marketing strategies mentioned to boost customer retention (email marketing, discounts, good product, loyalty program, etc.).
6. Diversify Business income
Your business model doesn’t have to be static — in fact, being agile and changing how you generate revenue is valuable.
This doesn’t mean scrapping your product or service entirely— it means expanding on it.
Think of ways to serve your market with an additional product or service. You can use this new product or service to upsell your new and current customers to increase average order value.
Sometimes it’s in the best interest of your business to introduce a product or service that costs less to fulfill and gives you a good profit. On average, services have more profit margin, so it may be best to start there.
Here are additional income streams to consider:
- Exclusive subscriptions/memberships
- eBooks
- Consulting or coaching services
- Social media platform monetization
- Affiliate sales partnerships with other businesses
- Paid masterclasses
7. Take Advantage Of Grants
Small businesses can apply for various grants that help them get started or expand their business.
Grants come with different requirements, so what your business gets will depend on the criteria you can meet.
Also, remember that grants aren’t loans.
They don’t need to be paid back, but some grants still come with expectations. In other words, some grant-providing organizations will want you to provide matching funds, or they may want you to provide a detailed plan for how the money will be used. There are plenty of organizations that can help you navigate the business grant process.
The best places to start are:
- Government grants
- State and regional grants
- Corporate small business grants
- Specialty small business grants (specific communities, i.e., minorities, women, veterans, etc.)
8. Explore Financing Options
Financing options can help your business easily cover expenses during recessions.
There are several forms of financing available for small businesses:
- Credit lines
- Bank and SBA Loans
- Equity financing
And more.
Credit lines let you borrow money now and pay it back later. Business loans are a great way to get money quickly, but they come with interest charges.
Equity financing deals with giving someone an ownership stake in your business in exchange for money. Equity financing is typically not recommended and should be only conducted after throughout consideration.
Final Takeaways On Beating Recessions As A Small Business
You can create lots of leverage for your small business when you plan ahead of recessions.
The strategies outlined in this guide help put you in the driver’s seat so that you’re proactive and not reactive to economic changes.
With better peace of mind and a sturdier business foundation, you can be more confident in your business’s longevity and the lasting positive impact you will make on your customers and staff.
Check out our other business articles to help you fill knowledge gaps in your entrepreneurship journey!