The last few years the talk always seems to be the same: recession this, recession that.

But is it really coming? And does it really matter?

Today we address a few ways to prepare for a recession.

But first, our sponsor.

 

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Recession? Who cares

A December 2022 Bloomberg poll of economists placed a 70% chance of a US recession in 2023.

Public sentiment was certain a recession is on its way.

But yet, nothing happened.

There are a number reasons why it didn’t transpire, all of which are above my pay grade.

Yet here we are, Q4 of 2024, and people are still predicting a recession.

While many are not as certain, JP Morgan still ​predicts a 45% chance of recession in 2025​.

So what do we believe? What do we do?

Believe it or not, I don’t think it matters.

Here’s why.

Whether there is a recession or not, you still have to execute daily.

And by focusing on whether there is a recession, you’re losing focus on the actions that necessary to continue to execute.

That doesn’t mean you won’t see negative consequences. And it doesn’t mean you shouldn’t take preventative action.

But it does mean, in my opinion, that should quit worrying about whether it’s happening or not.

The reality is, ​9% of companies come out of a recession stronger than ever​.

So, instead, we should be asking how can you be in the 9%?

As I reflected on this, I came up with 5 things to address:

1. Manage your cash
2. Improve operational efficiency
3. Stay informed
4. Invest
5. Limit new debt

Let’s dig into each of these and discuss what you need to do.

Manage your cash

Small businesses are especially vulnerable to recessions because of a lack of financial cushion and less leverage in markets, banking, and their industry.

So, our response should be to stack up more cash.

Unfortunately, too many small businesses ignore cash management.

 ​According to CB Insights​, the most common reason businesses failed was because they ran out of cash.

While few may think of it as the “root” reason, it’s the most common because business owners won’t give up until they run out.

So, what does that mean? That means you should:

1. Grow your cash reserves. It’s typically recommended to have 2-6 months of operating expenses and debt payments. With a recession looming, I recommend between 6-12 of months of cash. This allows you to withstand an initial downturn and make decisions more rationally, without the pressure of immediately running out of cash. Back in May I wrote about this in depth, ​so check it out here​.
2. Build a cash flow forecast. Understanding cash flow is one of the biggest unlocks I’ve seen as a Fractional CFO, as it impacts the confidence with which you can make all other spending decisions. To start, I’d suggest pulling 3 months of bank statements and manually tracking deposits, checks, and electronic transfers. This will get you a feel of how money is moving. As you understand this, use the Statement of Cash Flows for easy-to-implement solutions. If you need help with this, reach out and I’d love to help you get started.
3. Revisit your customer & vendor terms. With most contracts, you sign and forget. Understanding your payment terms across your contracts will illuminate expired contracts (renew with better terms) and areas terms aren’t being followed. Reach out to those that are having the biggest impact and look to get more favorable terms. Often you have the “standard” term because you never asked.
4. Clean up your receivables collection process. The first thing businesses do when feeling the pressure is stop paying their bills. So, if a recession is being felt, your overdue Accounts Receivable will likely increase. But during good times, it can be easy to get lulled to sleep and forget to check on your receivables. It’s important to stay diligent by looking at your Aging Report weekly and contacting customers when payments are overdue.

Improve operational efficiency

In 2010, Harvard Business Review wrote an article titled “​Roaring Out of Recession​.” The article is the result of a year-long study they did analyzing corporate performance during 3 global recessions (1980-82, 1990-91, 2000-02).

They grouped companies into 4 groups:

1. Prevention Focus: made primarily defensive moves
2. Promotion Focus: made primarily offensive moves
3. Pragmatic Focus: made a combination of offensive and defensive moves
4. Progressive Focus: made an optimal combination of offensive and defensive moves

This alone deserves its own article, which I’ll likely write in the future.

Progressive-focused companies significantly outperformed all other companies, with prevention-focused companies performing the poorest.​ ​ 

 

When looking at who cut staff during the recession, progressive-focused companies only cut staff 23% of the time, where prevention-focused companies cut staff 56% of the time.

While it’s just one data point, this data point makes it clear: defense alone is not a good recession strategy.

By focusing on operational efficiency, instead of cutting staff, you keep your employees focused on the business and not on whether they’ll lose their jobs.

Efficiency improvements also have a long tail. Whether the recession happens or not, the improved efficiency will reduce long-term cost and lead to an overall healthier company.

Look at:

1. Supply chain
2. Internal processes
3. Ways to automate

By turning inward and looking for ways to extract more cash out of the same activities, you’ll be setup well to be resilient during a recession.

Stay informed

I almost didn’t include this one, because I don’t want to encourage your bad [insert your favorite TV channel] habit.

In my 20s, I used to be into politics. I even had dreams of one day running for office. Now, I can’t wait for the presidential election to be over.

As I grew in my career, daily read a ton of news in newspaper articles, pundits on TV shows, and took pride in always being in front of the trends. It was even a running joke with my wife that no matter the story she brought up I had already heard about it. Sorry honey…

But then, one day I reflected on how I felt. Anxious, angry, and helpless.

With fears of recession, this gets even worse.

So when I say “stay informed,” I’m actually telling you DON’T WATCH THE NEWS.

Instead, talk to your customers, suppliers, and local movers and shakers.

It’s through these networks and conversations that you’ll get the real news.

They’ll have a better pulse on things that could directly affect your business, which is all you need to actually “stay informed.”

Invest

This may seem counter-intuitive, thinking this is the time to save up. And it can be, but by saving up you put yourself in a reactive and defensive mindset. As the article above showed, that’s a sure way to struggle during a recession.

The best way to do well? Have a clear head so you can make the best decisions.

That’s why investing is so important now: it prepares you for the potential storm.

It forces you to do the work so you’re not doing it while you’re in the fog of a difficult time, but before the difficult time.

A few ways to invest:

1. Employees. Investing in employee training and development during the good times will make the hard times better. Employees who fill supported will work hard to help you find solutions, ideally uncovering things you couldn’t uncover yourself.
2. Technology. (see operational efficiency, too) Businesses of the future will be driven by technology. Being proactive in implementing new technology will lead to higher margins, which helps with resiliency in hard times.
3. New markets. During a recession, reactive companies have to offload good assets at low prices. Prepare yourself for these investments before they’re available. Ask yourself where you might want to expand and start the research process today. Maybe even take steps to test them out with small bets before the recession arrives.
4. Depth in current markets. It may seem counter to the previous point, but they can work hand-in-hand. As other companies struggle, you have an opportunity to capture new clients and deepen your relationship with current ones by expanding your offerings within your current market. You are already an expert in what you do, so you’re in a prime position to uncover product/service differentiators quickly.

But limit new debt

In a recession, we’re looking for flexibility and debt provides that. But it increases cash burn, which is the opposite of what you want.

So, I always encourage businesses to be hesitant to take on new debt with a looming downturn.

A 2017 study looked at the relationship between housing prices, unemployment, and business closure. They found that businesses who started a recession with higher debt-to-asset ratios were more likely to fail during the recession.

More debt results in a higher structural cost, which means you need more cash to continue to operate. While principal payments are paying down the asset, interest payments offer no such benefit to the business.

To make payments, businesses have to make sacrifices elsewhere, which often wound the business. This falls under a defensive focus which is forced by debt.

When leading up to a recession, be care to not:

1. Take on too much new debt
2. Pay off current debt early

Consider debt-to-equity or debt-to-asset ratios for your industry to assure you’re debt load won’t eat of the cash of the business.

But, there are exceptions. In the last few years, I’ve encouraged businesses to take more debt because interest rates were so low. The kind of debt really matters, though. Improvements or new equipment that you were purchasing otherwise are great. That backup set of equipment? Probably not the right time.

Wrapping Up

Living in Oklahoma I regularly get to see bad storms: hail, tornadoes, and ice storms wreak havoc on our homes.

After big hail storms, you’ll talk to a roofer and hear them say “I never want the storms to happen, but they’re really good for business.” Do I believe them? Absolutely not…

In the same way, no one wants a recession. But, if your business is prepared and others aren’t, it can create a competitive advantage.

So, if after reading this you’re thinking… “I don’t want a recession, but it’d be good for business,” I don’t blame you.

But, never waste a good crisis.