How can you protect yourself and your business from the impact on an economic downturn during times of struggle? Given our size and the limitations that put on our cash reserves and credit, small businesses tend to take a major hit in recessions. Now is the best time to prepare while economic conditions are still relatively good to guarantee success in the long-term.
75% of economists predict that the US economy will enter a recession by 2021. Because consumer debt is higher now than right before the Great Recession of 2007-9, the next recession could be deeper and more severe than the previous one, according to some economists. A global trade war is ramping up and the skyrocketing federal debt also means our ability to fight one is less than it was then.
A study by the New York Fed showed that recessions hit smaller firms much harder than larger ones. This should come a no real surprise since small businesses do not have access to large cash reservice like large corporations often have. Therefore, small businesses a more difficult time weathering declining demand. Bank loans are harder to get in a recession, and this pullback in bank lending can sap small firms’ ability to cover their operational expenses. As a result, there is an increase in bankruptcies and closures.
Given the decade of the current expansion, few small business owners have yet to weather an economic storm. It’s easy to see how one could be lulled into a false sense of security. Complacency is one of the key factors that keep businesses from reacting soon enough. Making contingency plans for a downturn are as important as making plans for growth in order to protect yourself. Failing to do either can severely impact your business.
We like to share the story of a client of ours. Jacob was in business during the Great Recession. He runs a successful insurance business
“I started my company in 2005 at the height of the housing bubble. We came into the market focused on focusing on home-owners. In 2008, the bottom fell out of the sub-prime market. Therefore, the recession hit those owners hard. Suddenly, the houses were underwater. They couldn’t be bothered with insurance when they were worried about paying the mortgage”
Jacob had to learn how to protect himself during a downturn very early in his business life-cycle. Jacob kept his cool.
“Markets go down, but I didn’t panic. All of us were impacted by the recession. Therefore, both my clients and I were struggling. I used this as an opportunity to better understand their issues, and I had to get creative and come up with solutions to solve them.”
Jacob learned some important lessons that can be applied to all small businesses.
In summary, it is important to remember that recessions don’t last forever. The economy will come back. You just need to make sure that you have a plan to manage a downturn and that you build enough reserves to ensure a protection during downturns.
Brian Cairns, CEO of Prostrategix Consulting. Over 25 years of business experience as a corporate executive, entrepreneur, and small business owner. For more information, please visit my LinkedIn profile