Small and medium-sized businesses (SMBs) are known as the backbone of
the U.S. economy and play a major role in most economies, with
tremendous contributions to job creation. They represent about 90% of
businesses, and more than 50% of employment worldwide.
Although some continue to thrive, many SMBs were hit severely by the
economic impact of the COVID-19 pandemic. And now, just as a
post-COVID world takes shape, SMBs face the daunting task of
navigating through the possibility of a recession — many for the first
time. With record-high inflation and fears of a looming economic
downturn, companies, especially SMBs, need to recession-proof their
businesses by taking critical actions now.
These four recommendations will have great benefits for SMBs.
1. Assess Capital Needs Now
It is a must for SMBs to prepare now for a continued economic
downturn. Businesses should have saved or should look into obtaining
the capital they need to carry them for the next 12-24 months, just in
case future financing dries up or becomes prohibitively expensive.
Equity and credit markets have already started to contract, and terms
have become more onerous. Businesses that don’t have enough capital to
cover their downside risk are ill-prepared. The cost of capital is
increasing as the Federal Reserve continues to make its interest rate
2. Mind the Workforce
The strong demand and short supply of available, qualified workers is
one of the most significant factors driving inflation. Due to low
unemployment and a highly competitive labor market, wages are higher
than ever. It is important to re-evaluate your current workforce to
make sure you are keeping up with current market compensation and
Employee churn is highly disruptive, and replacing a worker who leaves
can lead to gaps in meeting customer service levels and will cost you
market wages to attract new talent.
3. Watch Customers’ Purchasing Behaviors
Inflation and the fear of a more severe economic downturn can force
people and businesses to be more selective about spending — this is
where you see the impact on the greater economy, even if it’s not
technically during an economic recession. When managing a business, it
is easy to be overwhelmed by economic data and various expert
predictions as to what will happen with the economy.
The best way to understand how your business will be impacted in the
future is to actively engage with your customers to hear whether they
plan on dialing back their purchasing or have the wherewithal and
confidence to keep spending. This will allow you to plan on whether to
scale your business up or down based on expected future demand.
4. Access New Markets
Today’s volatile environment requires different approaches to
successfully manage economic hurdles. It is particularly useful to
access new markets during recessionary pressures when a company’s
strategy cannot be based on selling in only one geography or sales
channel. Most SMBs in the U.S. earn the vast majority of their
revenues from domestic customers. Only a very small minority, 3%
according to the Small Business Administration, sell overseas.
Digitalization of commerce has made global expansion much easier, but
many small businesses don’t know how to enter foreign markets.
However, many of the e-commerce marketplaces in the U.S., for example,
offer global diversification through their foreign marketplace
offerings and there are many non-U.S. marketplaces looking for U.S.
sellers to join their platforms. Once commerce is digitalized,
physical borders become less of a barrier.
History proves that recessions can break or make businesses. While the
future may not look clear for SMBs, the best strategy for U.S.
companies to prepare for a recession is to perform sensitivity
analysis on their business and evaluate different scenarios from worst
case to best. Then make sure that you can withstand the worst-case
Capital allocation is critical, and businesses should make sure they
have enough capital to withstand a sustained downturn. However, that
does not mean eliminating investment or not planning for growth. A
well-capitalized company might be the last one standing in its space
if its competitors did not prepare properly, and will be able to
pounce on that opportunity, should it arise.