3 Reasons Small Businesses May Struggle in 2023 -- and How to Prepare

Anyone who tells you they can predict the financial future may be fooling themselves.

We all know by now that doom and gloom sells. Fear inspires people to delve more deeply into a subject. But we're not going to do that here. The truth is -- no matter what anyone tells you -- none of us know what 2023 will bring. What if it's wonderful? What if the economy takes off and your small business thrives? If any of us knew how to predict the future, there would be no losing bets.

Instead, let's look at some of the reasons small businesses may struggle in 2023. More importantly, let's consider steps you can take to prepare for bumps in the road. And if those bumps don't appear, great. Safeguards are never a bad thing to have in place, no matter how sunny or dire predictions may be.

1. Potential recession

While we managed to get through the worst of the pandemic with the shortest recession on record, there are an awful lot of people who sell advertising by shouting the word "recession" from the rooftops. And you know what? They're going to be right at some point. The thing is, there's no way to know when that might be.

Recessions are a natural and expected part of the economic cycle. Things get too hot, and the Federal Reserve has to raise rates to slow them down. Global pandemics hit, and the economy goes topsy-turvy. Since you know a recession can happen, do what you can now to prepare. Here are some ways you can do that.

Get control of your cash flow

According to a U.S. Bank study, 82% of business failures can be traced back to cash flow mismanagement. So before economic trouble hits, follow up on past-due invoices. If you don't have them already, have work contracts drawn up that include late fees. It won't help with invoices that are already overdue but may help you avoid the problem in the future.

Another way to reduce the risk of nonpayment is to collect an upfront deposit for high-paying jobs. A customer who has paid a deposit is far less likely to skip out on the final payment.

We understand the need to maintain goodwill with your customers, but that goodwill must come from a place of mutual respect. You provide what the customer needs, and the customer does their part by paying in a timely manner.

If possible, put a portion of the money you collect into an emergency savings account. That way, you don't have to panic if the furnace breaks or business slows to a crawl for a time.

Cut the fat

Take a close look at your monthly expenses. Are there any expenses that can be reduced? It may mean buying from a different vendor to get a better price, insulating your store to pay less for utilities, and paying credit cards off monthly to avoid interest payments.

If you have employees, ask them to help identify where cuts can be made. They may notice things you've overlooked. Besides, asking for input reminds employees of how much you value their opinions.

Secure financing

If you're concerned that your business can't weather a recession, open a business line of credit while things are going well. If you ever need to access the funds, the money will be there. If you don't, that’s one less payment you'll have to repay.

READ MORE: Best Business Credit Cards

Get creative

Brainstorm ways to increase business. It may be as simple as sponsoring a local little league team, placing fresh ads, or partnering with another business to promote each other.

2. Inflation

Knowing that there's little you can do to control inflation is a helpless feeling. It can also cause you to worry about the longevity of your business.

While it's never pleasant when the Federal Reserve hikes the prime rate (the interest rates banks pay to borrow money from each other), it helps to understand that it is done with purpose.

When the Fed raises rates, it's to slow an economy that is growing too quickly to be sustainable. When interest is cheap, the price of goods and services increases. The reason the Fed raises rates slowly and methodically is to slowly bring prices back down to Earth.

If you're concerned you can't ride out inflation until it's brought under control, see the tips listed above. The same moves that can safeguard you from a recession can also see you through periods of inflation.

3. Hiring is a bear

If you have trouble hiring in 2023, it is undoubtedly due to high competition. Here are a few tips to set your business apart.

• Offer flexibility: If employees can work remotely and want to, allow it. If they need every other Tuesday off to take their child to physical therapy, find a way to make it happen. Flexibility does more than make employees' lives easier. It also tells them that you value them enough to bend.
• Bake values into your business: People want to work where they're safe and where they know they will be treated with respect. Make it clear to all employees (including prospective employees) that your company values kindness. Talking about each other behind their backs will not be tolerated and because you see them as an asset, let them know that they will always have your respect.
• Offer fair pay: Gone are the days when a business owner could pay the lowest-going rate and still have their pick of the talent pool. Research how much each role pays in the open market and make it a point to match that amount (at the very least). If you don't have money in the bank to offer fair pay, it means you're not quite ready for a new employee.

The easiest way to get through a rough patch is to prepare for it. And remember, the forecasters don't always get it right. 2023 may end up being your best year ever.