Recession or Not, Some Tips for Small Businesses to Prepare
This week economist Paul Krugman wrote an interesting piece in the New York Times, “How a Recession Might—and Might Not—Happen” that I think is worth reading. Speculation about a recession ahead has surged in the last few months. Some of it has been through faulty comparisons of the current situation with the 1980s…or the stagflation comparison. Yes, we have a strong possibility of inflation (currently in the high 8% range) crossing over into double-digits with the next few monthly datasets. But the double-digit inflation of that time was paired with double-digit unemployment. We’ve got the opposite—a substantial shortage of workers.
For economists, a more ominous economic indicator has been the inversion of the yield curve—which occurred three weeks ago. This is when the yield rate on shorter-term treasury notes becomes higher than the yield on longer-term notes. The yield curve is the spread between a bank’s cost of money versus what it will make lending it out or investing it over a longer period of time. If the banks can’t make money, lending slows. And so does economic activity.
Unfortunately, since 1955 the yield curve has inverted 12 times, and there have been recessions in 11 of those occurrences. These recessions have come in as soon as seven months, or as long as 24 months out.
This is all transpiring as retail is coming off an 18-month surge, fueled by the uneven impacts of the pandemic, stimulus relief, the shift to buying goods over services, and strong wage growth (that until recently was outpacing inflation). This is not to say that the good times are over, or that a recession is absolutely inevitable. The Federal Reserve, in its efforts to tame inflation, will almost certainly raise interest rates by a full percentage point at its upcoming meeting. They still may be able to engineer a soft landing—slowing the economy, without crashing it—and the strength of the labor market is one of the reasons why. The last readings on job availability stood at a record 11.3 million. In the growth years from 2012 through 2019, this metric averaged 5.6 million. In other words, if the job market slowed to half of what it is right now… it would still be in decent growth territory.
Regardless, there are dozens of scenarios that could play out, but what is always important is that businesses have a downturn plan. I speak regularly at industry events as well as to the real estate and/or franchising groups of large chains on economic and retail trends. This week I am giving one of the keynote addresses at the ConnexFM 2022 National Conference. While I will be speaking about the state of retail and retail real estate—its astonishing rebound—I also have to talk about the fact that the recession risk ahead is substantial. The good news is I suspect that if one happens it will be more along the lines of an investor class reset (like the tech wreck of 2000/2001—that one didn’t even infect the greater economy and become a recession until 9/11 happened). But what may be more critical than predicting downturns—they always eventually occur, is sharing strategies on how to prepare for them.
This is especially critical for small businesses. They drive 44% of all U.S. economic activity (GDP), yet a recent JPMorganChase study found that the average small business holds 27 cash buffer days in reserve. This supports surveys that the Small Business Administration has run in the past that have determined that 25% of all small businesses don’t have enough cash on hand to withstand a one-month downturn. We certainly saw this during the pandemic; most of the restaurants and health clubs that failed did so in the first few months.
So here are some tips I have put together for small businesses to prepare for downturns, all of which start with having an actionable recession plan:
1. Create a Quarterly Cash Flow Forecast
a. You cannot manage what you cannot measure.
2. Plan for Different Scenarios
a. Best Case
c. Worst Case
3. Shore Up Your Accounts Payable/Receivable
a. Do a Deep Dive Review of Your Books NOW
b. Collect your receivables. If you were generous with terms during the pandemic, start tightening them up NOW.
c. Double-check your payables and your vendor billing.
d. Make sure you’re not being overbilled.
e. Pay your debts in a timely manner to reduce penalties.
4. Negotiate with vendors
a. Longer commitments at discounted rates for essential services will pay off in the long run.
b. Press for discounts wherever available.
5. Reduce Cash Going out NOW
a. Hold off on big purchases.
b. Delay launching pricey or risky new initiatives/ventures, unless you are certain they would build value in a downturn (pivots to recession-resistant goods or services. In which case, accelerate.
c. Look for small, non-disruptive cost-cutting measures you can make NOW, it will mean less disruptive ones later (like layoffs).
d. Cancel unnecessary subscriptions and services NOW.
e. Reduce redundancies in service and staff (try to pivot employees, if possible, to minimize disruption to morale.
f. Renegotiate your rent with your landlord. Consult a reputable commercial real estate broker.
6. Don’t Neglect Your Marketing Efforts
a. This is the last thing you want to cut when a recession hits.
7. Keeping Your Workforce Lean and Mean Before a Recession, Means Less Likelihood of Layoffs
a. Avoid over-hiring now, if possible.
b. Eliminate redundancies where possible.
c. Let attrition work for you.
d. Consider using temp agencies for immediate needs
8. Focus on Strengthening Your Relationships with Clients/Diversify Your Client List
a. If anyone’s client accounts for more than 10% of your total business, or if your top five clients together account for more than 25% of your revenues, you MUST diversify.
9. Transition Out Troublesome Clients
a. Unprofitable clients, those that ask for extras, complain regularly, pay late or under-pay may not be worth the effort.
10. Aggressively pay down debt NOW. FREE YOURSELF FROM DEBT BEFORE A RECESSION HITS.
a. Focus on higher interest rate debt first.
b. Having little to no debt entering a recession is always the difference-maker when it comes to survival… much less thriving.
c. Focus on reinforcing existing lender relationships or building new ones—you may need to borrow when the recession hits.
11. Focus on Doing What You Do Best
The most important of these is number 10: aggressively pay down debt. To paraphrase Warren Buffett, “it’s only when the tide goes out that you see who has been swimming naked.” He was speaking about recessions and debt. Too much debt, especially at the wrong time, is a killer. Companies that go into downturns with a war chest almost always prevail.
A quick reminder; check out our newly launched podcast, The Retail Grind. Click here to access our page and connections to all of the major podcast services where you can subscribe.
In each episode, my cohost Bill Yanek (ConnexFM CEO) and I tackle the latest economic, consumer and retail news impacting our sector. If you want to know the latest news on retail and restaurant expansion plans, consumer trends, economic forecasts… you name it… anything that impacts the retail and shopping center worlds we will be covering it in an entertaining and informative show for those of you on the go!
We have another episode in the can that will be dropping shortly and a whole lot of episodes in the works with some fascinating guests covering everything from reviving small-town retail to episodes on the state of the mall world and the state of grocery-anchored retail shopping centers.
I hope you enjoy and subscribe!
See you next week.