9 steps every entrepreneur should take now to recession-proof their business

Starting a business is fraught with risk and adversity in any environment. It can take years for a startup to find its footing and begin turning a profit — let alone survive. 

But launching (and running) a business in today’s uncertain economic climate is even more challenging. Although the pandemic is largely contained and job growth is robust, per U.S. Bureau of Labor Statistics data, most business leaders are worried about a recession as the Fed hikes interest rates again and the U.S. economy contracts for two consecutive quarters. 

Silicon Valley startup incubator Y Combinator recently told Business Insider that “things don’t look good” for entrepreneurs based on market conditions, and Elon Musk called a recession “more likely than not.” 

However, not every CEO sees a recession on the horizon. Uber’s Dara Khosrowshahi said his company’s data shows no warning signs of a recession, and Cisco’s Chuck Robbins said something similar about his own company and argues that all this talk of a recession could be a self-fulfilling prophecy. 

Interestingly, there is no one definition for a recession. The responsibility of identifying one lies with the National Bureau of Economic Research, whose website defines recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

How to get your startup ready for a possible recession

As a business founder, you cannot influence the advent of a recession, nor can you drown out ever-louder talk that one is imminent. You can, however, implement countermeasures to safeguard your business and mitigate the damage. 

Here are 9 expert-vetted recommendations to boost your chances of keeping your startup viable in turbulent times:

1. Don’t overspend:

This entails adhering to your budget and periodically reevaluating costs to minimize overspending, reallocate funds and ensure sufficient cash reserves. Consider reworking your business budget altogether to accommodate economic headwinds and recessionary fears. Decide ahead of time where you can cut costs without affecting operations. One way to lower costs could be switching from long-term contracts or in-house employees to outsourced services.

2. Pay down debt:

During a recession, businesses often see less money coming in, which in turn makes it difficult to pay off debt. Aim to raise monthly payments to bring down your monthly expenses to protect cash flow in the event of recession. When it comes to paying off debt, many businesses employ the popular debt avalanche or debt snowball method. 

3. Build cash reserves:

Financial experts tell consumers to keep three to six months’ worth of living costs in the bank in case something bad happens, like losing a job. Similarly, setting aside three to six months’ worth of costs is a benchmark businesses should strive for as part of their cash management strategy in an inflationary environment. 

4. Identify growth opportunities:

It may seem contradictory to grow at a time of cost-cutting, but if you have the money, a recession might be an excellent opportunity to do so by buying factories, equipment, product lines or even entire companies that are priced for a speedy sale. Some of today’s most-admired businesses launched in a downturn. 

5. Cultivate leads:

Lead generation is essential for any business that wants to grow. It becomes even more important when the possibility of a recession looms and customers cut their spending. To cultivate leads, approach existing clients about potential business prospects, ask for referrals, attend networking events and consider employing other lesser-known lead-generation strategies.

6. Teach employees new skills:

To make the most of a downturn, some companies decide to invest in upskilling staff through certification programs, virtual courses, software training and mentoring opportunities. When employees learn new skills, both they and the business benefit in the long run in terms of performance and productivity.

7. Assess risks:

Investing and forming strategic alliances in a turbulent market is something you’ve probably never done before. But can you bear on your own the increased risks and losses a recession could bring on? A business owner’s willingness to be aggressive can affect the firm’s financial health, sales prospects and emergency cash reserves. Before deciding whether to take an entrepreneurial risk, there are some preemptive measures you can take rather than simply throwing caution to the wind.

8. Prioritize long-term goals:

Your focus can easily be diverted to putting out fires at the expense of long-term planning if a recession happens. This emphasizes the need to formulate a strategy before a recession.

9. Prepare for multiple scenarios:

During a recession, multiple forces will be at play that could affect your company. To the extent possible, prepare responses for these what-if scenarios in advance. If you have thought through a contingency plan for each of these scenarios, you can take corrective action as soon as an unexpected challenge surfaces.

Takeaway

Every business owner would do well to keep these pointers in mind even when the economy is booming. Consider that your business continually faces risk other than a recession. That means risk preparation will keep you from getting caught off-guard and increase your business’s odd of success in multiple scenarios.

Want more?

Escalon provides comprehensive back-office solutions to startups to emerge robustly from a recession. Escalon’s services support firms with outsourced finance, accounting, human resource, risk management and compliance. Talk to an expert today.