How to Prepare Your Business for a Downturn

Small businesses are often hit the hardest during an economic downturn. Many small business owners today still remember the pain of the Great Recession of 2007 to 2009: staff cutbacks, sluggish demand, reduced cash flow.

Fortunately, the 10 years since have seen a period of strong growth, with increasing rates of employment and consumer spending. Innovations in technology have also advanced swiftly in the past 10 years, leading to the rapid growth of startups in the areas of video streaming, transportation, e-commerce and more. 

Unfortunately, what goes up must come down – sooner or later. Even when the general business cycle is expansive, particular industries can face significant periods of contraction. According to the Q2 2019 Private Capital Access (PCA) Index, a study conducted by Pepperdine Graziadio Business School with support from Dun & Bradstreet, 49% of small to medium-sized business respondents feel the current business financing environment is restricting their businesses’ growth opportunities.

The good news is that with preparation, a downturn doesn’t have to have the same devastating effects as a recession. Businesses that plan for a rainy day may even gain a competitive advantage over those that are not looking ahead.

Top risks facing small business today

The first step in preparing for an economic slump or shift in the marketplace is understanding how your business may be at risk. Areas of vulnerability can become much bigger problems during a period of economic or financial uncertainty. Identifying these risks can help you formulate a plan of action to safeguard your business when the time comes. Common risks to small businesses include the following.

  1. Financial risks. This is usually experienced in the form of unexpected expenses or a sudden reduction in cash flow. This could mean slow payment or nonpayment by vendors, a decline in consumer demand or an increase in interest rates on business loans and lines of credit. These are all typical side effects of a slowing economy. Of the small to medium-sized businesses surveyed for the PCA Index, 24% predict that an increase in the federal funds rate would restrict their ability to secure contracts, expand into new markets and grow their business.
  2. Loss of competitive advantage. This usually follows when a product becomes outdated and is no longer desirable to consumers and/or when a disruptive company enters the marketplace and offers a replacement product that is more attractive. This can occur as new technology allows for greater personalization, ease of use or cost advantages.
  3. Business interruptions. These can happen when an unexpected event such as new industry regulation, supplier complications or a natural disaster forces a company to slow or halt business. According to the PCA Index, more than half of respondents do not have cash on hand to cover emergencies resulting from severe weather conditions, such as damaged property or loss of business due to an unexpected closure.
  4. Cyberthreats. The need for cybersecurity is a growing concern for businesses of all sizes. In order to stay competitive, businesses find themselves storing an ever-increasing amount of customer data. That data is valuable and is always at risk of being lost or stolen. Some small businesses lack the tools and technical expertise to properly store and govern the data they are collecting. Limiting access to sensitive information and making backup copies of important data can help protect your business from a cybersecurity breach.
  5. Business reputation risk. Most businesses need a strong online presence to survive these days. However, with consumers demanding more transparency from companies, businesses may feel increasing pressure to reveal business information once considered proprietary about their privacy and data-collecting policies, business partners and ethical stances. Moreover, businesses and their affiliates are expected by the public to comply with government regulations and the modern zeitgeist on issues such as workplace equality, environmental sustainability and fair labor.

How to safeguard your business

You don’t have to wait until something happens to protect your business. Being proactive can help make your business more robust, so that if and when the commercial environment suddenly changes for the worse, you may be able to reduce the impact on your business. The tips below can help safeguard your business against adverse economic conditions while keeping up with demand and retaining customer loyalty.

  1. Diversify your investments, your client base and your marketing efforts. For example, many small businesses are overly dependent on a single large client – that big client going out of business could spell disaster. You can avoid such a fate by increasing the number of accounts you have while also diversifying the kind of clients you market to, the industries they’re in and the ways you market to them. Simply put, don’t put all your eggs in one basket.
  2. Develop a plan in case of an emergency. Once you have identified what risks your business is likely to face, you can create a disaster contingency plan. What will you do if your income decreases? What will you do if you are forced to reduce or cease operations unexpectedly? Having a written plan of action in place can ease your business’s recovery in many common scenarios. Further, make sure you have the necessary insurance in place to protect your business from liability and to protect your assets in such circumstances.
  3. Build and maintain business credit. This can improve your chances of securing a loan or line of credit with favorable terms. If your income is reduced or you need cash fast in an emergency, you can apply for funds to pay suppliers, fill orders and keep customers happy. This can also help improve your business relationships by increasing trust and credibility for your organization. Having a solid business credit file means you may be better able to negotiate a deal with a creditor or supplier that will allow you to continue operating in difficult times while still meeting your financial obligations.
  4. Protect your files and devices. Back up important files offline so that you have a copy in case your computer system is compromised. Limit employee access to sensitive information by employing passwords and encrypt devices that contain sensitive information. Make sure your paper files are stored securely as well. Finally, use two-step authentication to secure your cloud-based systems.
  5. Factor environmental, social and legal considerations into decision-making. Also, always be conscious of the social context of your business decisions – especially when posting online. Try to be as in tune as possible with how your customers think and feel about social issues, and take them into account when making purchasing, partnership or policy decisions. Discovering how your customers would react could be as simple as asking them.
  6. Never stop learning. Stay informed about current market conditions, new technologies affecting your industry and the activities of your competition. Keeping up with changing industry regulations and consumer expectations can help mitigate business reputation risk. This way, you’re less likely to be caught off guard by events and you can plan ahead and adapt before the health of your business suffers.

The economy goes through regular cycles of prosperity and scarcity. When facing negative revenue shocks, the planning and preparation you make during the good times might be the difference between a survivable business setback or an unendurable calamity. You can begin securing your business against future disruption today.

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