Recession Readiness for Small Businesses

Jay Jung explains how small businesses can prepare for a recession by investing in finance and creating a restructuring plan.

Today’s guest post is by Jay Jung, Founder and Managing Partner at Embarc Advisors.

While Treasury Secretary Janet Yellen has recently dismissed fears of a recession, other economists disagree. Whether or not the US is on the verge of a recession today, wise business leaders are always prepared for one.

Toward this end, a thorough understanding of your small business’s finances becomes critical. Below, I outline ways small businesses can best prepare to weather the storms of recessions.

Mastering your business’s finances

For starters, a proactive approach is better than a reactive one, so get a handle on your small business’s finances long before a recession threatens to arrive. Investing in finance gives you the ability to perceive financial difficulties in advance, which positions you best to overcome the challenges that are likely to emerge.

To gain control of your business’s finances, track your budget closely on a monthly basis. In addition, measure your cash flow carefully and develop a reliable 13-week cash-flow forecast. Make sure you can generate predictions with 95% accuracy one to two weeks in advance. That way, if your company starts not being profitable, you will understand your runway. In other words, you will know how long your current cash is likely to last.

While having a line of credit or revolver can inspire confidence, be aware that banks can change these agreements at any time. They may even “call the loan,” forcing you to unexpectedly repay the debt immediately. Make sure your corporate credit card has sufficient capacity. If your spending increases, the credit card company may request some financial due diligence, so be ready for that. Finally, have a healthy reserve of “safety cash” stashed away.

Creating a self-help restructuring plan

Before a recession hits is also the time to assemble a self-help restructuring plan. What options for economizing does your business have?

While developing this plan, keep in mind that, during a recession, additional challenges can arise for small businesses. For instance, the cost of borrowing may increase further. As the economic pain spreads, customers may pay late, vendors may require earlier payments, and inventory can be tied up for longer. This means your working capital will deteriorate. You may also see lower revenue due to lower volume or prices.

Depending on your projected runway and cash needs, consider external investment (e.g., mezzanine debt, equity injection, etc). Don’t bank on external funding, however.

I recommend keeping your marketing and sales efforts strong since these outlays allow you to control your own destiny in a recessionary environment. Relying only on word-of-mouth and referrals means you don’t know when or where your next customer is coming from.

That said, make sure you track the efficacy of these campaigns. Otherwise, you may pour valuable cash into a black box.

Don’t forget to consider the upside — your plan should include strategies for pivoting if the business environment rebounds quickly. Think of ways how can you emerge as a winner from this positive scenario.

Finally, decide on the threshold your business would hit in order to trigger various cost-saving measures. If you try to figure it out when a crisis is at your doorstep, it may be too late.

Implementing the strategy

In my experience, small businesses often take action too late. If you ever find yourself going over budget on certain items, then implement remedial measures as soon as possible. After all, a budget isn’t just wishful thinking, it’s a plan of accountability that you made and now need to adhere to.

Toward that end, review all major vendor contracts and renegotiate rates wherever and whenever possible, and cancel where applicable. Similarly, review your headcount and actual staffing needs. Avoid aggressive hiring, and don’t pursue a mentality of “growth at all costs.”

At the end of the day, strong customer relationships are what will get you through the recession, so be sure to demonstrate flexibility and work with your customers. After all, it’s better to give some concessions than lose a loyal customer.

If you do hit the threshold that your restructuring plan specifies, then rip the bandaid off and take those cost-cutting measures. As painful as this may be, it will help you avoid the death spiral.

Recessions are challenging times for every business. Position yours for success by taking control of your finances, creating a restructuring plan, and being prepared to use it.

Jay Jung, a small business thought leader, is the founder and managing partner at Embarc Advisors and has nearly 20 years of experience in strategic finance. Jay is former Goldman Sachs Investment Banking Vice President and McKinsey & Company Engagement Manager. He currently works with startups as a fractional CFO or advises them as a consultant. Most recently, he has successfully advised on capital raises for several startups – including during the COVID-19 crisis. He also co-founded a technology startup that raised capital from Softbank and other VCs.

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