The “R word” is back. A growing number of economists and business forecasters are raising the likelihood of a recession.
I know, I know, here in Florida we just escaped a hurricane and now we are talking about recessions? But recessions hit smaller companies much harder than larger ones, so it behooves a small business to get prepared.
Nearly 3 out of 4 economists expect a recession before or in 2021, according to a National Association for Business Economics survey. It would end the longest expansion period in U.S. history.
Some economists believe the next recession could be more severe than the Great Recession of 2007-2009. The reasons: business and household debt is at higher levels, a global trade war is ramping up and federal debt has climbed.
Does 2021 seem far away? 38% of economists predicted that a recession will occur next year. The poll was taken before the latest inverted yield curve, when longer-term Treasuries pay less than shorter-term ones. That’s a harbinger that has occurred before each of the past five downturns.
Florida’s economy may soon be slowing, too
Jerry Parrish, the chief economist at the Florida Chamber Foundation, has been using the R word too. He said he believes the probability of a recession in Florida has increased “substantially.” His comments cite the inverted yield curve as one of the reasons.
Parrish now pegs the likelihood of a recession in Florida at 34.2% in the next nine months, up from 29.9% in July and from 20.8% in April.
“This doesn’t mean we’re destined to have a recession, but the reduction in business investment that’s happening, along with the global slow-down, do increase the odds of it happening,” Parrish said last month.
The state shows solid economic activity, including a 3.3% unemployment rate and 227,200 new jobs. Still, consumer confidence in August recorded its largest drop in four years. All five components of the index fell, particularly confidence in Floridians’ current personal financial situations.
“A recession is worrying for companies of all sizes, but small business owners are often at greater risk,” said Matt Baker, VP Corporate Strategy and International Expansion of FreshBooks. one of the leading small business accounting software makers. “Compared to larger organizations, during a recession they often deal with softer demand from their clients and find it harder to drum up new clients. To make matters more stressful, small businesses often don’t keep as much cash in reserve, and they can find it harder to secure loans when the economy is struggling.”
This inevitably leads to an increase in bankruptcies and business closures. An analysis by the Business Journals of U.S. Census Bureau data found more than 170,000 small businesses in the U.S. shuttered their doors between 2008 and 2010.
To avoid being shut down by an economic slowdown, here are some of Baker’s top tips for small businesses seeking to recession-proof themselves:
* Don’t wait until 2021 to prepare yourself for a potential recession.
2021 might seem far off – but it’s really not, especially when it comes to making major changes within your business if necessary.
* Diversify your service offerings.
Sometimes being a small business and trying to boost your revenue is a bit of trial and error. But once you’ve been up and running for some time, you should have a sense of what’s most effective at driving revenue and what isn’t.
“Know how you can expand on the services your business currently offers to serve a larger clientele, or to deliver more for your existing customers. It’s generally easier to retain customers than it is to acquire new ones,” Baker said.
During slow periods, consider investing more in your marketing. You can also experiment with some of your pricing models. For example, if you regularly bill the same clients, consider putting them on retainer so you can reserve time for recurring work.
* Do a black and white review of your expenses.
Develop an understanding of costs and what can be cut to increase cash. This might mean hiring conservatively – or instead of hiring full-time staff, hiring contractors, Baker said.
Make sure your financial reporting system is in order. It doesn’t have to be complicated, but you need to be able to track invoices, outstanding payments, and expenses.
Ensure you have a way to categorize your expenses. Do you regularly run Profit & Loss reports for your business for full visibility into your income and expenses?.
Don’t make a huge investment unless you need it. This is a matter of timing – you don’t want to miss out a crucial opportunity. But consider it even more carefully than you normally would.
* Brainstorm ways to pull forward income.
Know your current invoicing practices and how they may need to be modified now to have more cash in the bank. Do you know how much your clients owe you? Are they paying you on time, or are they contributing to a cash flow crunch because they’re regularly late?
“At FreshBooks, our research found 40% of self-employed professionals have at least one invoice that’s overdue and averaging more than $2,500,” Baker said. “It’s important to have a system in place to nudge them or follow up with late payment reminders, or even to set late fees to push them to pay you on time.”
* Practice your word of mouth marketing and referrals.
Baker’s final tip: It’s free to ask existing customers for referrals. There are lots of ways to generate leads aside from traditional paid advertising. Find out how you can upsell your existing clients, and ask them to refer you to others in their network, he said.
A recent survey by online lender BlueVine of 1,000 small businesses showed that 80% worry about a recession. Yet, 44% of those polled haven’t taken any measures to prepare.
Of those who are preparing, most are adding new products or services or diversifying product lines. One in five say they have taken necessary steps, and 28% will do so within 12 to 24 months, according to Small Business Trends.
Other measures cited include scaling back on large investments, seeking more affordable partners and suppliers, and slowing down hiring.