{"id":2944,"date":"2022-08-19T16:52:20","date_gmt":"2022-08-19T20:52:20","guid":{"rendered":"https:\/\/www.skypointfcu.com\/wph\/workarea\/?p=2944"},"modified":"2022-08-31T14:25:08","modified_gmt":"2022-08-31T18:25:08","slug":"4-things-small-businesses-should-do-now-to-prep-for-a-recession","status":"publish","type":"post","link":"https:\/\/www.skypointfcu.com\/wph\/workarea\/blog\/4-things-small-businesses-should-do-now-to-prep-for-a-recession\/","title":{"rendered":"4 Things Small Businesses Should Do Now to Prep for a Recession"},"content":{"rendered":"\n

Speculation about a looming recession is putting pressure on many small-business owners to protect themselves against a downturn, and experts say it\u2019s not too early to start preparing.<\/p>\n\n\n\n

A June 2022 Goldman Sachs survey of over 1,500 small businesses found that 93% are worried about a recession happening in the next 12 months, which could be particularly brutal for small businesses. During the 2007-2009 recession, small businesses failed at nearly twice the rate of the economy average and experienced bigger sales drops if they did survive, according to research from the Federal Reserve Bank of St. Louis.<\/p>\n\n\n\n

Two small-business pros say prioritizing these four things right now can help small-business owners be ready if a recession comes.<\/p>\n\n\n\n

1. Keep cash king<\/strong><\/p>\n\n\n\n

Half of small businesses have a cash buffer of less than one month, according to a 2016 JPMorgan Chase survey of about 600,000 small businesses. \u201cThat\u2019s definitely not enough cash to be able to survive in a big downturn,\u201d says Jody Grunden, a certified public accountant at Summit CPA Group in Fort Wayne, Indiana.<\/p>\n\n\n\n

What to do now:<\/strong> Grunden says he\u2019s advising his small-business clients to up their cash reserves to six months\u2019 worth of expenses or 30% of their annualized revenue.<\/p>\n\n\n\n

Catherine Valega, a certified financial planner at Green Bee Advisory in Boston, says 12, 24 or even 36 months\u2019 worth of cash reserves isn\u2019t out of the question. \u201cIf the contracts aren\u2019t coming in or people aren\u2019t paying their bills, you can get through it without having to shutter,\u201d she says.<\/p>\n\n\n\n

The extra cash padding can also thwart irrational decision making. \u201cThere\u2019s a lot of dumb mistakes that we make when we\u2019re in a position where we\u2019re panicking,\u201d Grunden says.<\/p>\n\n\n\n

2. Rein in receivables<\/strong><\/p>\n\n\n\n

One way small-business owners can build up cash reserves is by minimizing the number of customers who owe them money. That starts by creating and monitoring a list of outstanding invoices (good accounting software<\/a> can generate that automatically). \u201cA lot of times it\u2019s pretty easy to let invoices go past the due date, and it\u2019s really important that that never happens,\u201d Grunden says.<\/p>\n\n\n\n

What to do now:<\/strong> First, Grunden says, try to set up as many customers as you can on recurring payment plans so those cash inflows arrive automatically. Second, he adds, if your customer is another company \u2014 especially a large one \u2014 try offering a discount for paying early. Many large companies have internal policies requiring their accounting departments to pay an invoice early if it saves them money, which means faster payments for you. Third, Grunden says, reach out to new customers after sending your first invoice to ensure there are no issues with the address, file format or other details that could delay payment.<\/p>\n\n\n\n

3. Contemplate that credit line<\/strong><\/p>\n\n\n\n

The size of your line of credit<\/a> should be about equal to the amount of cash you want to have on hand, Grunden says. \u201cThat doesn\u2019t mean you use it,\u201d he notes. \u201cThat just means it\u2019s available there as a secondary cushion.\u201d<\/p>\n\n\n\n

What to do now:<\/strong> A line of credit isn\u2019t a substitute for an actual cash reserve; it should be in addition to that reserve, according to Grunden. If you already have a line of credit, consider pursuing a two-year renewal soon, he says. \u201cIt\u2019s a simple thing, just going in and getting it now when the credit is there versus waiting until your business is in really bad shape six months from now \u2026 because you\u2019ll not get an extension at that point.\u201d<\/p>\n\n\n\n

4. Adapt and ally<\/strong><\/p>\n\n\n\n

Recessions can test an entrepreneur\u2019s will and creativity. \u201cBe flexible, and pay attention to your market, and know when you need to pivot,\u201d Valega says.<\/p>\n\n\n\n

What to do now:<\/strong> Take stock of your financing options<\/a>, just in case. Borrowing from a 401(k), credit card balance transfers and home equity lines of credit, for example, could be considerations, especially if a more traditional small-business loan<\/a> or line of credit isn\u2019t possible, Valega says.<\/p>\n\n\n\n

\u201cSeek out your support group,\u201d she adds. \u201cIf you\u2019re a CFO of a small business, get involved with a CFO organization. If you are a sole proprietor, make sure you\u2019re talking to other solos in your industry \u2014 and not in your industry.\u201d<\/p>\n\n\n\n

\u201cHave that community to fall back on because if things do get really ugly, it\u2019s just nice to commiserate with others,\u201d Valega says.<\/p>\n\n\n\n

Also, manage your mindset. \u201cYou probably need a healthy dose of optimism,\u201d she notes. \u201cThings don\u2019t happen to you, they happen for you. Keep going with that mentality.\u201d<\/p>\n\n\n\n

More From NerdWallet<\/strong><\/p>\n\n\n\n