How to Secure Your Small Business Against Economic Downturn

economic downturn

An economic downturn is a scary event that will put a halt to business operations at best, and at worst, completely pull the plug on a business. It comes as no surprise that small businesses are hit harder than larger ones.

According to a report by Main Street America, “of the nation’s approximately 30 million small businesses, nearly 7.5 million small businesses may be at risk of closing permanently over the coming five months, and 3.5 million are at risk of closure in the next two months” due to the coronavirus pandemic.

One reason could be this:

When the economy is in full bloom, many business owners neglect to take preventative measures to guard their businesses against such devastating events. When such occurs, most would take on a Hail-Mary pass as an attempt to stop their businesses from shutting down.

Even when there are no clear manifestations of an economic crisis, it’s crucial to always be on guard. Here are some helpful tips for you to not only survive an economic downturn but more so, thrive.

Have an Efficient Economic Downturn Plan

Just like a business plan, an iterative economic downturn plan should be a part of every business operation. This plan will serve as your blueprint for drastic changes that will have a huge impact on your business. No one can accurately predict when or how an economic downturn will happen, but you can minimize the brunt of the effect by having a clear roadmap for various scenarios.

Some may call it paranoia, but as the former CEO of Intel, Andy Grove, eloquently said: “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”

Take some time to build your economic downturn plan. Have a thorough brainstorming session with your team. Figure out which areas of your business are most vulnerable and which part can help you pull through.

Know Your Business’s Financial Health

Diving deep into your numbers periodically will help you prepare for the bad times as well as fortify the good ones. The key areas that you should look into are the following:

  1. Net Profit Margin

A business will not survive if it’s not profitable. It may take a long time for businesses to get to this level, but eventually, some will. Net Profit Margin is an indicator of profitability. It tells you how good your business is doing in terms of revenue. NPM is expressed in percentage and varies from business to business. For example, an NPM of 15% is normal for restaurants, while 8% is the average for hotels.

  1. Solvency

It’s not uncommon for businesses to incur debt; however, those debts must be paid on time and with the right amount. Solvency is the ability of a business to pay its debt. Some of the ways to improve your business’s solvency are to ensure that you resolve the current one; do not take out a new loan; check your personal expenses and business expenses, and increase your revenue. These actions can help you keep your finances in order.

  1. Operational Efficiency

Having an efficient business operation means achieving the highest productivity with the least amount of time, effort, and expense. To achieve this, you must have the right people, the right operational system, and the right mindset. Analyze your operational margin. See which areas need to be trimmed down or bulked up.

Smart Cost-Cutting

While reducing expenses is important to keep the business running, it’s also equally important to first assess your business’s operation. Drastically cutting costs will eventually affect your bottom line.

You can cut costs on areas that will not have a bad impact on your operations. For instance, it might look like a good idea to cut staff, but less staff means longer working hours for the rest, thereby decreasing productivity. On the other hand, you can have your not-so-old machinery fixed instead of buying a new one.

Have a Financial Safety Net in Place

Having a safety net that you can turn to when times get tough is another non-negotiable when it comes to safeguarding your business during economic downturns. A few of the financial safety nets that you must have on your business arsenal are as follows:

  • Line of Credit
  • Avoid Personal Guarantees
  • Surety bond
  • Having 6 months’ worth of operating cash expense in the bank

Strong Market Positioning and Customer Relationship

Many businesses treat marketing as an afterthought. In reality, having a solid marketing strategy and execution from the get-go will pull you through the hard times.

A good market positioning will keep you on top of your customers’ minds during an economic downturn and long after it’s over.

Part of marketing is understanding the radical shift in the behavior of your customers and adapting to those shifts. Apart from those, marketing enables a business to have a strong bond with the customers—a bond that will outlast any crisis.

Know the Different Business Relief Programs and Grants

Have a good list of various legitimate business relief programs that are available for your industry, organizational structure, and business size.

For example, the U.S. Small Business Administration (SBA) has several programs for small businesses that are seeking financial relief. There are multiple grants that businesses can take advantage of as well—from Federal grants to private grants for startups.

Have More than One Source of Income

“Don’t put all your eggs in one basket” may just be the business-saving adage you need. Having multiple streams of income will allow you to invest in new sources of growth and save more money. Apart from those, you can fund a faltering business without having to get a loan.

Conclusion

By securing your business against adversities, you will avoid hasty decisions that will turn out to be costly. You will be able to see your business through and pivot when necessary. While it’s true that no one can fully prepare for what’s to come, “it is still better to prepare than to repair.”

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