Economists are forecasting a recession in 2023 due to inflation, labour shortages, and rising interest rates

If you have started your business in the last 13 years or so, you haven’t yet weathered a downturn or recession like the one being warned about now. Although this recession is expected to be moderate and short-lived by historical standards, it will drag on Canadian growth.

 

What to do when the economy is going down?

First things first, be super clear on what YOU want and how YOU define success. Having a clear goal is a lot easier to navigate towards, especially when there is a lot of fearful noise surrounding you. Remember that an economic downturn doesn’t have to doom your business; it could actually help highlight some cracks in your business plan that you wouldn’t have otherwise noticed.

 

Start doing homework to figure out where you are and how much ‘runway’ you have ahead of you. Figure out:

1. Your burn rate 

How much money do you spend each month? What’s the rate of depletion of your company’s cash pool?

 

2. Your sales pipeline 

How many leads or people are waiting to buy from you each month? How many potential customers first come into contact with you, and what steps does your company take to nurture those leads to ultimately make a purchase?

 

3. Your break-even point 

What number of sales are needed just to pay the bills? You need to know your break-even point where your total revenue equals your necessary expenses in order to fulfill that sale. Analyse your books to understand whether you need to increase revenues or lower your costs.

 

4. Cash in the bank 

How much real cash do you have in the bank? We’re not talking about a line of credit or credit cards here.

 

5. Receivables 

How many sales have been completed but not yet paid? Are they going to be paid and how long do you expect to wait?

 

How to increase your runway, and what are the tradeoffs?

How can you make timely shifts in your business? Look for a way to change up your distribution, such as selling online rather than, or in addition to retail. Maybe free up some of your gated information via online content. Content distribution can help boost your brand awareness, collect loyal followers, and encourage your readers to click and even become loyal customers.

One of the biggest concerns entrepreneurs have is with gaps in cash flow, which makes it difficult to consistently meet payroll, pay suppliers, and cover routine expenses. This will only become more pronounced in a recession. Financing cash flow is possible and can help companies like yours meet those operational expenditures and even power growth. 

Invoice financing, also known as receivables financing, is a short-term loan that is borrowed against outstanding invoices. A business receives a next-day cash advance for receivables clients are due to pay. During a recession, many small businesses will have a harder time covering expensive materials or unexpected costs that pop up while waiting for money to come in, and that’s where a working capital solution like Velocity by FundThrough comes in. This is a great option if you have a net profit on the sale but having a cashflow/timing or receivable issue.  Here’s a referral link if you’re interested.

Figure out how to cut unnecessary expenses. Forget about finding one idea that will radically change the cost structure of your company, thereby solving your problem in one go. Instead, plan to reach your goal with a combination of actions. Start by seeing if you can consolidate or get rid of incidentals, then gain control of “miscellaneous” spending. Identify and look at that for which the cost exceeds the value. Once you have identified unprofitable items or services you can decide what to do about it. Could you raise your prices? Should you keep them because they’re strategic to win other sales? Is there a better way to produce or offer them? Should you eliminate them altogether?

You can also reduce excessive service levels, and change certain processes. In fact, do you still have too many repetitive manual processes? Where do you use people to process forms or information repetitively, rather than do it electronically, with little or no human intervention? Learn about building a Tech Stack to optimize your processes.

 

What will significantly decrease your runway, and what are the tradeoffs?

Now’s not the time to be making large purchases, like new equipment, although you may want to lease if absolutely needed. There are always exceptions though. Our client Jeff began losing clients at his sign printing business during the beginning of the pandemic. He took a gamble by pivoting to mask printing and investing in an expensive machine. His gamble paid off and he made lots of sales which made up for buying the machine. Great for Jeff,  but most people don’t gamble on a winning idea during times of stress. As a general rule, try not to make large purchases when your sales are declining. 

Another thing that will decrease your runway is anything that is a monthly/recurring expense unless it directly leads to more profitable sales. Avoid hiring new employees and make sure there is a real need for any employees you have.  Would your service/prdouct be better off with few employees that would be more motivated by a raise?  Or other new perks?  You would need to do some math but it could net more cash in the bank.

 

Where to get support?

For the numbers, look to your books. It is incredibly important that you have them up to date, accurate and detailed. Properly tracking your monthly profits and losses leads from accurate bookkeeping, which allows you to know if you’re making a profit or a loss, how much money you should be saving for taxes, your ability to pay any money you owe with only cash or current assets,  and to make forecasts. Soon you’ll have a “sense” of whether it’s right or not. At that point, call on your business advisors (Accountant, Lawyer, Mentor) who are familiar with your financial situation and can give you professional advice on ways you can improve your business, both in the short-term and long term.

You can also get support through your professional association, because it’s likely that your whole industry has similar pain points. Do you have other business owners in your building? They may be worth contacting. You can also learn and receive support via online groups, masterminds, trade association, and even your local chamber of commerce. Do you listen to podcasts/blogs/YouTube channels that are run by the ‘big boys’ in your industry? Do you login to Linkedin? Maybe it’s time to find senior/retired owners in your profession to ask for their advice. Be respectful and they may be willing to help.

 

Know when to pivot

The world changes and sometimes the way you do things needs to as well. In an emotional time like the beginning of a recession, try to take your emotion and pride out of your business decisions, as they are your biggest expense. Don’t let your ego get in the middle.  Remember that the more you prepare, the less you need to. Make all of your decisions with care and thought, including whether to take your company in a new direction. Take the time to prepare, and then prepare some more.