Leading a Small Business Through an Economic DownTurn

In recent weeks, the Coronavirus has taken over our newsfeeds, conversations, and, unfortunately, our finances. While we can't do much with the first two, we can share some information to help get you financially fit for a potential downturn in the economy.

As a small business owner, should you cut costs, or increase spending? Should you borrow money for a financial cushion, or get rid of all your debt to stay as lean as possible? Or, should you even be making drastic changes in the first place?

While the future is uncertain, there are actions you can take now to get your small business ready for any potential bumps in the road.

Know Where Your Money is Going

Understanding your numbers is always a good idea, regardless of the situation. However, amid a recession, the margin for error is narrow, very narrow.

With up-to-date bookkeeping and accurate monthly financial statements, you can see precisely where your finances stand. That way, you'll be able to identify where you can cut costs and adjust your finances. With your Xero dashboard, you'll be able to see your cash situation without having to jump between accounts.

Utilize Your Assets

Utilizing your assets is something you should be doing, whether in a recession or not. A 2017 study from the University of Lisbon states this is particularly essential if you plan on surviving a recession. Researchers analyzed 1,600 Portuguese small businesses during the 2008 recession and found that companies who focused on improving return on their assets had a high probability of succeeding.

The report shared improving returns on fixed assets had the highest impact on operating profit, followed by gains from increasing returns for intangible assets. Translation, businesses that did the most with what they had are likely to survive a recession.

So, review the assets you have already in place. Do you have an excess inventory - consider running a promotion to clear shelves. If you have excess cash on hand, look to re-invest that money into the business. Are clients behind on payments, it may be time to have a chat about due dates.

Get Rid of High-Interest Debt

Once you've reviewed your assets, its time to look at how to get rid of debt and interest payments; these two things can kill your business during a recession.

According to researchers at MIT and NYU, companies that failed in the 2008 recession had a lot more debt going into the economic downturn than the ones that survived. This stands to reason as the more debt you have, the more cash you need to make your interest and principal payments. Letting interest payments get away from you is horrible in any situation, but in a recession, it can turn your business into a tailspin.

How do you prevent this? Start by prioritizing debt from the highest to the lowest rate, and start paying down the high rate debts as these debts will help you accumulate greater liability in the future.

Don’t be Reactive Plan Ahead

Forecasting is essential for your small business. But in a volitale economy, the numbers can do up and down more than usual. So it's vital to focus on your expenses and not spending more money than needed. Do what you usually do, and don't overspend; this will help create a financial cushion while keeping an eye on the long game. Look to position your business to withstand a year of negative growth.

If you haven't already, now may be the time to go to your bank and request a line of credit. Not to use, but to have in case you need it. This approach may be a bit unnerving to some, but the numbers back it up. In 2010, Harvard Business School studied the performance of 4,7000 companies during the 2008 recession and found that reactive spending harmed business performance.

The best way to respond to a recession is not to react but focus on running an efficient business. However, if you see expenses are draining your revenue, you'll need to cut costs to keep business going.

The Wrap Up

Getting your financials together, using your assets, and keeping your debts low isn't a miracle cure. However, they are things that successful business owners do no matter what. Making changes in a recession is crucial as it can mean the difference between closing the doors and survival.