Pitfalls to avoid in small business during a recession

4 Minutes Read

Keeping a small business afloat during a recession can be very stressful. When a recession hits, it means there is a significant economic downturn. Unfortunately, the economy is currently amidst a recession and there's no way to know for certain when it will end.

If you're a small business owner, don't panic. The light at the end of the tunnel is closer than you think. In fact, a recession is a great time to solidify your business plan and create some cash reserves for emergencies.

The bottom line is, you need a business model that works in order for your small business to be recession-proof. Let's dive into the impact a recession has on small businesses, how to save money during a recession, and business tips to follow that will get your business through it.

Impact of a recession on small businesses

There are many negatives that result from an economic downturn; it's important to know what could happen so your small business can prevent it. Here are some of the most common impacts a recession has on small businesses:

Reduction in profit: Though no one wants to think about it, it's important to know that it's common for small businesses to face a reduction in cash flow during an economic recession. After all, if consumer spending is down, it's likely your business will be making less sales. Reduced cash flow slows everything down and makes it harder for businesses to receive payments on time.

Loss of demand: With a decrease of consumer spending comes a decrease of demand. Less money in consumer's pockets means less money consumers are able to spend on your business. Small businesses that require inventory to be shipped in by larger outside vendors may find their goods to be shipped in much slower than usual.

Marketing challenges: Less revenue means less money to spend on marketing and advertising. When this happens, businesses are then forced to choose between where to spend their hard-earned cash flow, so they'll keep customers coming and increase market share. As a result, many businesses turn to more cost-effective marketing strategies during a recession.

Bankruptcy: While this one is a true nightmare, it's important to know all possibilities of what could happen. If a small business gets hit hard enough and loses a bulk of its sales and revenue streams they may be forced to go out of business.

It's crucial for your business to save money during a recession to lessen any potential challenges.

How to save money during recession

Financial resources aren't exactly plentiful during a recession. During these tough times is a good time to save money so your business has enough money saved for the future. Here are some common ways your business can save money:

Cut low-value costs: Recessions can often lead small businesses into a tricky financial situation. Large companies often view layoffs as a good way to cut costs. While a recession is probably not the best time for hiring, it's the best time to cut costs viewed as low value. Conduct a self-audit to know how much money you're spending on material costs, staffing, and any other overhead costs so that your business knows where to make cuts.

Build an emergency fund: It's a good idea to have an emergency fund to prepare for the long-term. Check your invoices to make sure you're collecting all cash flow receivables. Also, set achievable goals to account for the number of sales you hope to generate in the near future. Creating an emergency fund will provide your business with security and stability while being able to pay bills without digging into your business' savings, or worse, your personal savings.

Stay on top of finances: During a recession, it's even more important to stay on top of finances, especially invoicing and payroll. Also, steer clear of late payments when paying expenses. Monitoring bills and paying them on time will help your business stay afloat and keep it thriving in the long run. Creating a payment schedule to account for all overhead costs is a helpful solution.

Business tips during a recession

During past recessions, consumer spending has decreased which led unemployment rates to fall as well. Similarly, interest rates fell, and the government banked on more people borrowing money, resulting in less financing. Here are some tips your small business can follow during the recession: 

Utilize social media: Social media is a great option when it comes to marketing that won't break the bank. Having a solid social media strategy for your business will maximize potential to increase sales. Use social media analytics to your advantage when making decisions on what content is going to lead to the largest ROI.

Understand your customer base: During a recession it can be more difficult to attract a new customer. Put some reliance on current customers, specifically loyal customers, when thinking about who will keep coming back to purchase from your small business. Customer loyalty should be top-of-mind. Be sure to take advantage of your loyal customers and prioritize marketing to them as they're more likely to spend their money purchasing from a business they trust.

Update your marketing plan: When it comes to marketing efforts, the solution is not to decrease marketing spending, but to change your strategic approach to tighten up your marketing budget. The best way to do this is by removing spending on marketing that doesn't provide as much ROI.

Pay off high-interest credit card bills: Business expenses are very real, and oftentimes a high-interest credit card is used. It's wise to pay off these bills as soon as possible. During a tough economic situation, it's also important to open another line of credit if possible so your business can gain access to additional short-term funding.

Now that you know the impact a recession has on a small business and what you can do to set your business up for forecasted success, you'll know just what to do by the time the next recession rolls around.

If your small business is looking to strengthen its marketing efforts during the recession, we'd be happy to help. Set up your discovery call to get started today!

Picture of Stephanie Milne

Stephanie Milne

Stephanie is a digital marketer passionate about storytelling and content creation.