7 Ways to Prepare Your Business for a Recession

Preparing now can save you pain later.

The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Although there are no absolutes when it comes to recessions, rising inflation and the shrinking of the U.S. gross domestic product (GDP) for the last two quarters are all indications that a recession is looming on the horizon.

What happens during a recession

The NBER looks at several factors to determine if there is a recession, starting with GDP. But they also look at other indicators to determine whether a recession has occurred, including:

1. Income
2. Employment
3. Industrial production
4. Wholesale and retail sales

During a recession, product sales decline, employers reduce their workforce, manufacturing slows, and spending drops. As a result, cost of living pay increases and jobs may be harder to find. Though recessions are common, they can be frightening, especially for smaller businesses with fewer resources. The good news is that there are ways to prepare for a recession before it impacts your business.

1. Cut spending

The time to cut down on spending is before a recession begins. Start by tracking cash flow better. And if you're not currently tracking cash flow at all, now is the time to start. It can also be helpful to prepare a bare-bones budget that cuts extra spending, which allows you to see how much you need to get by, should sales drop. And if you're looking to increase spending by upgrading computers, moving to a bigger office, or adding staff, you should probably put those plans on hold.

2. Be more selective when offering credit terms

To remain competitive, most businesses find it necessary to offer credit terms to their customers. While you may be reluctant to change credit terms for your existing customers, it's important to be more selective when offering credit terms to new customers. This may require some extra due diligence, but time spent up front is more important than spending time trying to collect on delinquent accounts. And if cash flow becomes really tight, making the move to all-cash sales, at least temporarily, may be necessary.

3. Get a line of credit

A good way to shore up your cash reserves is to obtain a line of credit from your bank or credit card company. Remember, you don't have to use it, but it can bring some peace of mind if you know you have emergency cash readily accessible. But the time to apply for a line of credit is now, before a recession strikes, since like most businesses, banks and financial institutions typically limit the availability of lines of credit. It's also a good idea not to rely too heavily on a line of credit, since banks have been known to reduce or even cancel them during a prolonged recession.

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4. Strengthen your cash reserves

If you have cash reserves for your business, now is the time to start funneling additional revenue into it. And if you don't have cash reserves, it's a good idea to start saving now. Having cash put aside can help small businesses cover expenses should revenue drop. But remember, cash reserves should only be used for emergencies.

5. Renegotiate with vendors and suppliers

Chances are your vendors and suppliers are feeling the effects of a slower economy as much as you are. But it's worth trying to renegotiate. While it's unlikely that you'll be able to secure lower pricing, you may be able to get better payment terms or a discount for paying early.

6. Manage your accounts receivable more aggressively

In the past, you may have given your credit accounts some leeway when it came to paying late. But with a recession looming, it's important to stay on top of your accounts receivable balances and initiate collections processes sooner rather than later. Remember, it's likely that your customers are initiating the same cutbacks that you are, so changing payment terms (see #2) may be necessary.

7. Streamline operations

Though streamlining operations is often done as a last resort, doing so before a recession hits can help you retain your staff and still maintain your current customer load. However, if you're carrying a large number of employees, you may find it necessary to downsize, particularly if your sales numbers take a hit as well. You may also want to consider outsourcing certain areas like HR and payroll instead of looking for full-time help.

There is nothing you can do to prevent a recession. But successful business owners prepare ahead of time to help them weather the storm and emerge even stronger afterward.