We can feel that the economy is slowing. Perhaps, as many analysts predict, we are even headed into a recession. Venture capitalist and private equity firms are putting less capital to work in 2022 and fund-raising for entrepreneurs is getting difficult and going to get worse. But as we know, startups and small businesses are fundamentally different from larger companies. And as such, recessions affect them differently.
Unlike large, global corporations, smaller businesses don’t typically have the diversity of revenue streams to help them stay afloat early in recessions. Similarly, they don’t always operate on the same quarterly and annual budgeting plans but instead tend to rely more heavily on month-to-month cash flow, which means they feel the hit faster than some larger companies.
But the good news is that smaller actions yield bigger results in terms of reforming the company and creating resilience in the face of adversity. What’s more, many small businesses have strong relationships with their customers and communities, a loyal fanbase that might be willing to stick with the business through thick and thin.
Let’s remember, in general, small businesses create between half and three-quarters of the jobs in the U.S., so they are an important economic driver in the aggregate. While they might have to make difficult cost-cutting measures during tough times, many of them are also likely to return to investment and growth when the situation improves. The key is making smart business decisions right now.
According to a McKinsey article from September 16, 2022, companies need to make critical adjustments to their businesses as soon as possible. Some of the most common include pricing adjustments and managing exposure to either one time or variable costs. Some companies might just take action on short term costs and that won’t help these companies long term. If we are headed for a more long-term inflation/recession environment over the next 12 months, companies should also be thinking about more structural solutions that not only manage costs but help build a stronger company with potentially new business strategies for both existing and potential customers.
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Take a moment and breathe. The key, as hard as it may seem, is to stay calm and think in a rational manner. Employees and investors are watching and your leadership skills are now very important.
Review the business strategy. Together with key employees and potentially outside advisors, review your current business strategy to make timely adjustments.
Preserve cash. Cash is king and is the life flow of a small business. Preserve it as best you can by collecting money owed your business more aggressively, watching all costs and looking for ways to increase revenue.
Examine the business model. Review your current business model and see if any adjustments can yield benefits by either finding new customers, reducing costs or even creating a new product or service from an existing one.
Right size if you have to. You know that you have to take steps to save the business so if you need to make employee cuts, do it early and wisely. Your growth will come back once the economy starts growing again.
Review all expenses with a sharper eye. Take the time to review all accounts payable accounts…all of them. Save where you can without hurting the core business.
Look for revenue gains from existing customers. Look at your current customer needs and see if you can provide them with additional services or support. They might also be cutting back and perhaps they can consolidate more business with your company.
Plan for growth. Even while you are adjusting the business, you need to plan for the eventual growth that will come in the near future. Don’t be surprised or have no plan for growth as the economy returns as the upswing might be strong.
