Recession or Not? Plan Either Way!
Are you prepared for the potential ebbs that your business may experience over the next year? Although economists’ opinions are divided, key indicators point towards a U.S. recession by 2023. What you do now could make or break your business, leaving you successful or bankrupt.
What is a recession anyway? The non-profit organization that officially declares recessions, the National Bureau of Economic Research (NBER), defines a recession as “a significant decline in economic activity spread across the economy lasting more than a few months.” These declines are usually visible in Gross-Domestic-Product (GDP), a country’s total market value of all products and services made during a specific period. However, these declines are also visible in other areas of the economy, such as real income, employment, industrial production and wholesale-retail sales.
Without getting too technical, some precursors of an impending recession have arrived. A few are detailed below:
1. Inverted Yield-Curve: Short-term treasury bills attract higher interest rates than longer-term treasuries. This is usually a sign that investors are losing confidence in the economy.
2. Rising Interest Rates: The Federal Reserve raised interest rates by half of a percentage point on May 4, 2022—the largest in twenty-two years!
3. High Inflation: The current inflation rate over all categories is 8.3% but is significantly higher in areas that affect us daily—fuel and food—which I’m sure we are all feeling in our wallets.
A Glass Half Full Mindset
But it’s not all bad news, and the best advice is to maintain perspective:
1. We still have a booming real estate market despite a cool down. Low inventory and rising construction costs will likely keep prices above market value and climbing for some time.
2. The unemployment rate is at 3.6%, and employers are eager to hire. Average wages and added benefits for employment are rising as well.
3. Consumer spending hit a record high in the first quarter of 2022 and is forecasted to continue rising.
So how can you prepare your business for potential setbacks or a recession if one should occur? The first piece of advice is that if you haven’t started planning already, do it now! Waiting until a downturn happens could be too little or too late. Below are some suggestions to help get you started:
1. Cash Flow: As I mentioned in last month’s article, businesses can go broke due to a lack of cash flow. It’s imperative to know the amount of cash coming into and out of your business. If you don’t have a good handle on it now—get one!
2. Business Plan: If your business does not already have one, it is best to get one crafted immediately. Having a plan, or roadmap, for your business is essential to its growth and is attractive to potential investors or lenders.
3. Emergency Fund: I also mentioned this last month, but it bears repeating—saving for a rainy day is good advice and can help your business stay afloat in lean times. The standard recommendation is six months’ worth of expenses, but if that isn’t attainable now, start somewhere.
4. Secure Capital: Saving six months of an emergency fund isn’t easy, so access to capital during a cash flow crunch can help keep the doors open. Prepare gaining access to options, such as a line of credit, instead of scrambling when in need.
5. Review Costs: During the flows of profitable times, many businesses adopt the philosophy of spending money to make money. However, expenses can add up quickly, making saving a fund of cash reserves difficult. Even worse, if you are spending every dollar the business brings in, it is often too late to change course by the time a setback appears. So, re-evaluate your current expenses and make cutbacks where necessary. Invest in areas that will grow your customer base and increase profits but do so in moderation.
Hopefully, this list will serve as a springboard for a new plan or inspire you to re-evaluate your current one.
I hope we will not see a full-blown recession anytime soon, but preparing now is prudent. We will certainly experience economic fluctuations since that is the nature of the business cycle, and a recession will come eventually. However, taking a strategic approach now will help ensure the success of your small business and keep you thriving through it all.