Whatever we do, a recession is coming in 2023. And small and medium businesses stand to be particularly affected.
Unlike large enterprises, SMBs don’t typically have the cash reserves or huge profit margins needed to guarantee survival. And while huge businesses might be able to cut costs through layoffs, this isn’t always an option for SMBs, whose workforces are often leaner to begin with.
But while we can’t stop the recession, we do have a bit of time. Smart businesses are using that time to prepare and protect themselves from the worst of the damage. This gives them the best chance of emerging on the other side unscathed and ready to grow.
Are you a small or medium-business owner worrying about the oncoming recession? Read on for seven ways to recession-proof your business.
Are we already in a recession?
Back in early January, the chief of the International Monetary Fund (IMF) predicted that one-third of the world’s economies would be hit by recession in 2023 — including half of the EU. But is the UK’s economy in recession already?
A recession is defined as a fall in GDP (known as negative growth) for two consecutive quarters. Due to a surprising (though still small) amount of positive growth in November 2022, the UK’s economy has not yet fallen into recession. However, experts are more or less unanimous that it’s coming this year.
What will the recession mean for small businesses?
When a country’s economy is in recession, household budgets tend to be tighter. This means that demand (and revenue) will fall for many businesses. This is especially true for those selling consumer products, but even B2B companies will see reduced revenue as their customers tighten their belts.
Because of this, many UK businesses will be forced to take cost-cutting measures, which typically include things like layoffs and hiring freezes. Not only can this decrease morale among employees, it can also mean that companies need to operate without a full workforce. This can make things even more difficult for those employees who are left.
At the same time, lenders tend to become more choosy about who they grant credit to in times of economic uncertainty. This means that SMBs, who are seen as riskier borrowers than larger companies, might find it difficult to secure loans.
7 ways to recession-proof your SMB
All of this sounds scary, but it’s important to remember that the recession will pass. And, although it’s not possible to 100% recession-proof your business, you can create the best chance of survival by planning ahead and making smart, logical decisions.
And so, in preparation for the coming downturn, here are seven ways you can recession-proof your SMB in 2023.
Look for alternatives to layoffs
When economic circumstances are tough, many businesses turn immediately to layoffs. But this isn’t the only solution to a difficult financial situation — and it’s not necessarily the best solution either. In fact, data from the Great Recession of 2007–2008 shows that companies that relied solely on cutting down their workforce had only an 11% chance of survival.
Layoffs hurt morale, which can have a significant impact on productivity. This is exactly what you don’t need in difficult times. Plus, recruiting, hiring and training new employees is expensive. Companies that make huge layoffs will need to replace those employees once the economy recovers —which can represent a bigger cost in the long run.
Thankfully, there are other ways of reducing labour costs: shorter hours or furloughs, for example. Another option to consider is introducing performance-based pay for certain employees. This ties labour costs directly to productivity or other business outcomes, which can make them more manageable while keeping employees happy.
Reskill, retrain and reorganise
During a recession, sales usually slow down. But instead of panicking, try to see this period as an opportunity to step back and re-evaluate your workforce and operations. This might mean reskilling or upskilling employees so that they’re better prepared to take your business in a new direction if needed.
It might also mean restructuring by giving more work to large teams with lower outputs, and rethinking management choices to remove unnecessary divisions between teams. This way, when the economy recovers, your workforce will be ready to tackle the next stage of your business head-on.
Stick to your core competencies in tough times
Diversifying your offering as a small business can be a valuable growth strategy — but now is probably not the time. The fact is, attempts to break into new sectors or launch new products often disrupt your core operations, even at the best of times. This is because they funnel time, money and other resources away from your key offering.
This can be a risk worth taking in times of economic prosperity. But you should think very carefully about whether you can afford to have your core offering weakened right now. There will be a time to try new things again in the future, but during a recession, it’s often best to stick to what you do best — and ensure you’re doing it well.
Secure financing before you need it
Securing financing is a viable option for keeping your business afloat. But here’s the thing: everyone is thinking about the upcoming recession — lenders included. This means that they have likely already tightened their requirements for borrowers.
Bank loans and other types of financing can also take time to secure. That’s time you might not have if you find yourself in a tough situation. Plus, waiting until you really need it can make you less likely to get a loan since lenders might doubt your ability to repay.
All of this means that the best solution is to secure financing now. Just because you’ve secured a line of credit doesn’t mean you have to use it. But having access to capital before you need it can save you from panic down the line.
Add flexibility to supplier contracts where possible
Now is also a good time to negotiate with your suppliers and service providers to see if you can add some flexibility into your contracts. While not every provider will do this, some may be willing to shorten contract or notice periods, especially if you have a long-term relationship with them.
They will usually expect a trade-off like a slightly higher rate or a flat fee if you have to cancel. But, while it might seem strange to think about increasing costs in the face of a recession, this will give you the ability to quickly cut costs if the situation calls for it. This could be invaluable if you find yourself in difficulties.
Never stop marketing (but be smart)
Many small businesses significantly decrease (or completely eliminate) their marketing budgets during difficult times. Here’s why this is a mistake: if you’re not marketing your business, no one will know about you. And if no one knows about you, they can’t buy from you. That means losing business at a time when you can least afford it.
That said, it is important to be smart with your budget during uncertain times. The key is to focus on the channels with the best, most reliable ROI. While consumers may have less money to spend, they are still making purchasing decisions. And an economic slowdown could be an opportunity to get a leg-up over competitors who have slashed their marketing budgets.
Don’t rely solely on permanent employees
During times of economic hardship, many businesses cut back on hiring — or freeze their efforts altogether. And this makes sense: recruiting, onboarding and training new employees is expensive. And it’s an expense that many companies want to avoid when there’s the possibility of layoffs down the road.
But businesses still need people — and there is a solution. Opting for freelance or contractor support instead of relying solely on permanent hires can help you to build flexibility into your workforce.
You can hire a freelancer or contractor for a one-off project, or contract their services on a regular basis. But either way, you won’t be tied into paying expenses for the long term. Plus, when you work with a freelancer or contractor, the rate you agree to will be the final amount you’ll pay — without the added expenses that come with hiring an employee. This can make working with contingent workers a much smarter financial decision when the economy is weak.
How Gigged.AI can help
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