What's Ahead: How to Prepare your Small Business for an Economic Slowdown

In early days of starting your business, you’ve considered many factors to the health and success of your endeavor, including the external economic climate. As the day to day operations and customer demands become more pressing, potential external threats to your business might not seem as important. However, it’s always important to consider the “what could go wrongs” so your business is set up to weather through any tough storms. Many economists predict we could see a slow down by end of 2019, which could impact everything from loans to consumer spending.

Also, studies show that forecasters are generally blindsided by recessions, precisely because they tend to be preceded by economic strength. When your business is doing well is precisely the time to start considering risks and threats that could impact your business. Having a strong risk mitigation strategy not only prepares you for economic downturns but also allows you to consider future impact should things continue to strengthen.

While each business and industry will have its own unique considerations, here are some general areas to consider to mitigate negative impact of economic slowdowns. If you are looking to better understand risk areas, mitigation strategies, and specific strategies for your business, reach out to Hawk Consulting for an initial consultation.

  1. Client Pool

    It’s important that you have diversity in revenue streams, which means you aren’t reliant on majority of your income from a few companies. If you mostly work with small companies, ensure you are working in a few industries so that if one can no longer afford your services, you still have a pool of clients. This is also a good time to work on building relationships with those in adjacent industries for referral business.

  2. Vendor Options

    Similar to diversity in clientele, being reliant on one vendor for your main product or service offering can be extremely problematic. You should always have a backup plan should your vendor stop delivering quality work or worse, experience financial troubles of their own. If this isn’t thought through in advance, you are at the mercy of the vendor, which can impact pricing, availability, and quality. Also, see if you can extend payment terms with your suppliers should you need more time to pay without penalty.

  3. Revenue Sources

    It’s also a good time to consider other ways you could bring in revenue outside of your primary product/services, such as advertising on your website. Do not neglect current revenue streams and ensure you have a pulse on your current clients and how you can add additional value to that relationship. This is also a good opportunity to understand your customer’s credit risk and know which customers cost more than they are worth and evaluate if makes sense to continue the relationship.

  4. Cost Reduction / Budget Restraint

    Knowing which areas you could sacrifice spending and still operate efficiently will be vital during a downturn. Consider outsourcing certain non-essential functions and maintaining low inventory levels to keep costs down. Making sure management has buy-in and understands repercussions prior to having to make these decisions to allow your company to operate lean and scale back as needed.

  5. Cash Reserve

    The same advice that individuals should save for a rainy day can be applied to businesses. Make sure all your money isn’t tied up in high-risk investments or financing, as much as possible. According to the McKinsey Institute, companies that were able to survive the last recession could finance internally through “high cash balances and a low dividend payout.” Have at least six months of reserves on hand to keep company operations afloat.

While this is just a brief overview of areas to be aware of, generating a full risk mitigation strategy will help your team prioritize focus and have your company more prepared for the potential of a weakening economy.