The One Planning Exercise That Might Just Save Your Small Business

Are you a small business owner?  How well do you manage risk?  I’m sure you’ve talked to your insurance agent, attorney, and even your CPA about risk management and all the things that you need to cover to protect you and your business.

As a financial advisor, I have found that many business owners, especially newer ones, don’t always plan for one of the biggest risks of all, and one that is almost a certainty if you’re around long enough; recession.

The business cycle is just that, cyclical.  Expansions followed by downturns followed by expansions.  Some of those downturns end up being more severe, enough to cause economic growth to decline and turn negative; a recession.  While it’s been 9 years since the last recession started in December of 2007, we have had cyclical slowdowns in 2011-2012, and in early 2016.  We got close to recessionary territory but didn’t quite get there.

Today, although they may have recently peaked, leading economic indicators have rebounding forcefully from those lows in February 2016 and are at levels usually seen in less than 4% of history¹.  Suffice it to say, there are few signs that a recession is imminent.  But that doesn’t mean it will never happen again.

The point is we will have another recession again and for many businesses, it can present great challenges.  So, what should you do?  First, know that each business is different.  They have different customers, sell different products and services, etc. and a recession will treat each one differently.  For example, a doctor’s office is likely to see less of a decline in patient flow compared to a restaurant may experience in terms of customers dining out.  Businesses that benefit from discretionary consumer spending may be more vulnerable than those that serve basic needs.

First, I think it makes sense to do some research.  Find out with as much detail as you may be able to about what types of revenue declines and other challenges were experienced by businesses like yours in past recessions.  2008 was the most recent, and for most, the most severe in anyone’s lifetime, so its undoubtedly a good, conservative benchmark.  The recession of 2001 was milder but can also provide some interesting data.  Talk to your CPA who, without disclosing any private information, can give you an idea based on past experiences and observations.  Consider talking to other business owners in your industry both local and elsewhere.  Even your industry association or Chambers of Commerce may have some data to help you.  However you get your information, it’s important to model through a recessionary decline in revenue to see what it does to your business, how it could affect your margins and ultimately your net income.  Many businesses with great margins may find their cost structure which was a breeze to cover may no longer offer such comfort.   Figure out where and what expenses you would and could cut and those that you may wish not to.  Cutting employees, humans, may or may not be necessary, but it’s very different having to layoff someone for something other than cause.

Once you have gone through this exercise and seen what the potential impacts may be, think about what it may take to plan for such a contingency.  For many cash is a dirty word.  I mean let’s be real, it pays next to nothing.  However, banks may also tighten up on lines of credit during a recession. This happened to many businesses back in 2008.  But cash reserves or other short-term cash equivalents can serve a greater purpose.  One, it makes it easier and offers more flexibility in making capital allocation decisions during a time of distress.  Second, many of your competitors may be suffering or may go out of business.  It’s important to be prepared to capture that market share and increasing marketing expenditures during a recession may be difficult if you’re not prepared.  Third, but by no means last, your liquidity position may be able to allow you to keep the key employees you need or want to hang on to.

The lesson here is simple.  Take some time to work through this type of planning exercise with your key management and the professionals you rely on, and maybe when we do experience the next recession it won’t mark a time of severe distress but that of opportunity for your business.

¹ Dwaine Van Vuuren, RecessionAlert.com