How to Prepare for the Next Market Downturn as a Small Business
Economic downturns affect everyone, but small businesses may take a bigger hit than larger companies. Operating on narrow margins with a limited customer base, small businesses have an inherent vulnerability. Even a small decline in revenue or increased expenses can cause the company to go under.
These issues may be avoided through diligent preparation for the next shift in consumer behavior. By paying close attention to cash flow and slowly building a broader revenue base, SMEs (small or medium enterprises) can increase their ability to weather the changes in market conditions, even before they arise.
Reduce Debt Expense
During good times, it’s easier for entrepreneurs to get favorable terms on loans and lines of credit. When the business is profitable and economic conditions are sound, it’s wise to revisit your long-term debt and consider refinancing. That way your debt is less expensive when things slow down.
Paying less in debt servicing is always a positive, but particularly important when budgets are tighter. Preventing default on long-term debt not only keeps the business going, but makes for an easier recovery when the economy improves again. Your available cash should go as little as possible to money already spent.
Monitor Cash Flow
Smart management of the money going in and out of your business can help you build up funding reserves for tough times. It’s also a good exercise of using your money well and preventing unnecessary waste. Review the terms of your invoicing and look for ways to cut back on your operational costs.
Getting paid more quickly allows you to earn additional interest on your incoming cash. It also allows greater flexibility for when and how you pay off your outstanding liabilities. Consider offering a modest discount of 2 to 4 percent for early payment. Invoice financing companies can also buy your outstanding receivables, taking a small percentage but getting you the money upfront.
Carefully analyze your expenses and see if there’s room for improvement. Everything from energy costs to insurance rates may be reduced with the right procedural changes or through direct renegotiation.
Increase Customer Base
Many small businesses rely heavily on one or two primary clients. It’s good think early about how you will retain those customers when demand goes down. Developing personal relationships with high-volume customers can be effective. Simple techniques like loyalty programs or discounts for tenured clients may keep them as supporters.
At the same time, try to build and expand your customer base. This is par for the course for any business, but it’s crucial not to become complacent when business is booming. Customer interest is sometimes fleeting, so try to nurture your existing base and continue selling your product to new segments of the market.
Explore Other Revenue Opportunities
There are always unexplored ways for you to earn more money. For SMEs product growth usually involves a balance between the investment outlay in new opportunities versus the potential returns. Switching up what you have on offer can be the key to building a business that rides out changing customer habits and needs.
Once you’ve analyzed your cash flow, revisit what you’re selling, where you’re selling it, and how. Consider add-ons to your offerings or product packages that add value to the customer. If you don’t yet have an ecommerce site, check out the possibility of selling online as well as in-store. Expand into new geographic markets, in particular if you foresee your existing market becoming oversaturated.
One frequently overlooked option is repurposing your existing goods. Many products serve many purposes, so there’s no need to stick with one when marketing your business. Vinegar is a baking ingredient and a natural cleanser. If you’ve been selling it as one, it’s relatively easy to switch to the other. For a service business, it may be a simple task of reframing what you do in order to reach a new customer. A company that provides educational materials, for example, can also consult on trends in the learning industry.
Run the Numbers in Advance
Performing a stress test on your business can give an indication of whether or not you’re prepared for a market downturn. After you’ve been tracking numbers for three to six months, run a series of “what if” scenarios and see the overall effect. By looking at this data, you see areas of weakness where it might be smart to place your attention.
For example, imagine you had a 15 percent drop in sales, or a 10 percent increase in wage costs. Presume 35 percent of your outstanding receivables were paid late, or not at all. By analyzing different circumstances, you may feel better prepared to make choices that help protect your business against a market decline.
Knowing well in advance the factors that could potentially break your business gives you the time to build up a reserve option. You’ll not only be psychologically prepared when those painful times occur, but you’ll respond with sound business sense instead of crisis-level panic.
Know Your Business
One of the benefits of planning for an economic downturn is really getting to know your business, inside and out. Entrepreneurs are typically in love with their ideas. Taking the time to delve deeply into the nuts and bolts of how those ideas are executed and sold can turn them from aspirations into lucrative endeavors. Small businesses can make it through the tough times, with just some intuitive foresight and careful planning.