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How to prepare your small business for a recession

Credit: VectorMine/Adobe Stock.

Unless you live in a hut in the wilderness without electricity or internet, consumers and businesses will find themselves facing many problems this year, including slow supply chains, rising costs of energy and materials, and rising prices. I guess. Rising rents and interest rates.

Given this background, it’s no surprise that the dreaded R word pops up in discussions about the economy. , So far, US consumers are still spending money.

Here’s what small business owners can do to prepare for a possible recession.

How is inflation affecting small businesses?

alm Small Business Advisor Logo - 7-6-22The recent rise in inflation poses a major challenge for small business owners who are grappling with a combination of four main inflation drivers.

First, wage inflation driven by strong demand for labor and reduced participation in the post-COVID labor market. Second, inventory and raw material costs will rise due to supply chain disruptions and rising energy costs. Third is the rise in real estate and rents. And fourth, higher interest rates make it more expensive to finance inventory, building facilities and working capital for growth. Together, these inflationary factors affect nearly every business in America.

Inflation, interest rates and rising energy prices are likely to continue for some time, as are global supply chain issues that continue to plague US manufacturers, contractors, retailers and other US businesses. Given these obstacles, U.S. business owners are finding ways to cut overhead costs, capitalize on potential efficiencies, and consider products that may appeal to changing consumer tastes in a slowing economy. It is wise to explore.

Retailers should assess current inventory levels and check sales trends frequently. At the same time, personal income and personal consumption increased in 2022. In other words, American consumers continue to spend despite rising gas prices and other inflationary pressures. This is good news for small businesses that earn revenue from consumer spending.

How should small businesses prepare for a potential recession/recession?

Kapitas CEO Ben Johnston said:Photo provided Kapitus COO Ben Johnston said:

Nearly all businesses are cyclical and most follow the general expansion and contraction of the economy as a whole.

In addition to being cyclical, many small businesses also tend to be seasonal, expanding and contracting at several points throughout the year. As a result, most small businesses recognize the importance of tight control over expenses as they need to expand and contract labor costs, inventory, energy costs and funding lines throughout the year.

Most successful small business owners understand the need for expansion and contraction and work closely with employees, suppliers, and funding partners who provide services to help business owners manage through these cycles. have built a good relationship.

What are your strategies/best practices for surviving when business slows down?

When business slows down, it’s important to pay close attention to cash flow. Businesses need to have sufficient cash on hand to weather prolonged sales declines. This means considering better payment terms with vendors, working with financial firms to understand the financing available to your business, and vetting how you can turn fixed costs into variable costs.

Businesses should avoid making big bets in uncertain times. This means avoiding taking over the space next door while sales are down. This is even if the landlord presents a “very good” offer. Clear economic benefits and demonstrated demand.

Managing labor costs is a major concern for many businesses, including restaurants, many of which have installed QR codes to enable remote ordering and more self-service options. Restaurants are also encouraging customer pick-up over delivery and adjusting their menus to offer cheaper, less labor-intensive items for their kitchen staff.

Consumers are also feeling the pain and are cutting costs. How can small businesses retain customers today?

During a recession, customers become more price conscious, so it is important for businesses to consider adjusting their product offerings to meet changing customer preferences. For example, retailers find value in stocking low-priced products instead of high-priced brand names.

Restaurants may consider reducing portion sizes to keep prices consistent, but offer “super-size” options for those willing to pay more. may be reduced, reduced in size, or eliminated stylization that does not affect functionality. Meeting customers where they are and helping them save should pay off.