Anybody can make money in a thriving economy—but can they maintain profits during an economic downturn? As a small business owner, worries of an economic downturn might keep you up at night. Do you have enough cash on hand to cover your bills? Will next quarter’s product launch fall short of projections? Can you last for months on end if the market doesn’t recover quickly?
Most likely, you want to avoid navigating economic uncertainty without a plan. One of the most proactive steps a business owner may take is to develop a strategic plan for challenging times. Imagine you’re a football coach who just lost their starting quarterback. Do you have a game plan in your pocket for the backup?
Let’s unpack what an economic downturn means for the economy and how one might affect small business owners. What steps can they take to help maintain—and perhaps even grow—profits during an economic downturn?
What Happens During an Economic Downturn?
With higher unemployment rates, decreased consumer spending, and production cutbacks, downturns affect almost everyone—though some perhaps more than others. The aftershocks of COVID-19—and subsequent ongoing geopolitical turmoil—continue to ripple through the global economy, keeping forecasters guessing about when the next downturn is going to strike.
What to Look Out For
During a downturn, market declines can make most consumers tighten their wallets, meaning they spend less on your business. You, in turn, may fall behind on bills and struggle to save money—which can be scary when it feels like there’s no end in sight.
Economic downturns—and even recessions—can be typically short-term, lasting about 10 months on average between World War II and 2020. The economy will always recover.
Do your best to keep an eye out for the following possible indicators to recognize a downturn when it may be happening:
- Less Disposable Income: During an economic downturn, incomes may stagnate or decrease as employers cut back on labor hours. This means less money in the consumer’s pocket.
- Unemployment: Downturns lead to increased unemployment rates for similar reasons.
- Rising Material Costs: Inflation causes the price of raw materials to spike, forcing many manufacturers to cut back on production. You may struggle to source materials and products as you used to, leading to less income. In an extreme example, during the Great Recession, employment in the manufacturing sector fell by 10% as employers were forced to lay off workers due to rising material costs.
What’s on the Horizon?
While still high, inflation has trended downwards, partly due to an aggressive interest rate hike strategy implemented by the Fed. And yet, while labor yields seem to have been uneven, the labor market overall remains hot.
The confusing signals of the past year—standing somewhat in contradiction to the usual “boom-bust” cycle that has characterized the American economy for over half a century—have other economists speculating that rather than avoiding an economic downturn, we may have simply delayed it. And recent geopolitical turmoil places even more uncertainty on models.
Regardless if and when said downturn descends, high inflation and interest rates have impacted businesses substantially already. You likely don’t want to get caught off-guard if a potential downturn is around the corner too. Here are some strategies you might consider to help your small business flourish in an economic downturn, drawing insights from the lessons learned during the recent upheaval—the Covid-19 pandemic, still fresh in our memory.
Building an Adaptable and Flexible Business
They say, “don’t fix what isn’t broken”—but that doesn’t mean the same business model can succeed in all seasons. Past strategies may not work during an economic downturn, nor will they necessarily meet consumer needs. It’s not about overhauling your business model; rather, consider “bending” it to meet the current climate based on market research.
A strong, steady business model keeps your business on stable ground. However, some flexibility may be critical to survive changing times. Potential downturn aside—trends evolve year in and year out. How often do your products, price points, and models adapt to changing times?
Who’s Affected by the Economic Downturn?
Of all the industries impacted by Covid-19, food service and hospitality were hit especially hard. According to S&P Global, restaurants were second only to airlines as the most impacted industry.
While many shuttered their doors, those who could pivot their business models survived. Some shifted towards offering pre-cooked meals that customers could easily prepare at home. Delivery also played a massive role in maintaining cash flow, as many restaurants leveraged services like UberEats, GrubHub, and DoorDash or converted their waitstaff into delivery drivers.
Investing in (And Adapting To) Technology
Economic upheaval has a way of birthing new and exciting opportunities. As they say, “necessity is the mother of invention.” We’ve witnessed this maxim in action repeatedly—and there’s no reason to believe a future economic downturn probably won’t pave the way for yet more new technologies and trends.
Consider how video conferencing exploded during the pandemic. At the onset of the Covid-19 pandemic in the spring of 2020, companies pivoted towards video conferencing tools like Zoom to keep their ships afloat. Many saw the writing on the wall and invested in more robust conferencing technology to enhance the consumer/client experience.
Such proactive moves primed those firms for future success: now, on the other side of the pandemic, gone are the days of flying cross-country for meetings. Even as in-person meetings have returned in many applications, video conferencing has become a new standard—and saved businesses a great deal of time and money.
Similarly, with retail stores closed, eCommerce websites like Shopify and Amazon solidified their market position. They’re still reaping those benefits today, as many consumers pivoted to shopping online exclusively.
Investing in technology can help save you from cutting staff or services when an economic downturn is in full swing. Consider how tech can improve your internal process by asking the following questions:
- Can you strengthen your ordering processes with digital management tools?
- What are your current sales and operational challenges—and how can tech correct them?
- How can you leverage existing data to improve your current pain points?
Looking at What’s Currently Profitable
Harkening back to “don’t fix what isn’t broken,” one might take that idea further by doubling down on what is working. Cutting back doesn’t mean halting investment in the company—especially in areas actively turning profits.
When economic downturn strikes, consider starting your evaluation with an audit of your current practices and employee activities. This helps you determine what makes the most money—so you can shift focus to those interests accordingly.
A hypothetical scenario: perhaps you've been experimenting with different marketing techniques to reach new customers. You have one team focused on lead calls, another making door-to-door sales, and one more generating SEO blog content to boost your online presence.
After auditing all three, you may notice the door-to-door technique isn’t as productive as hoped. Meanwhile, your SEO team is generating more new customers than ever before.
You could find ways to improve your door-to-door strategy at any other time. With a looming economic downturn, might it be better to scrap what isn’t working and focus on what’s making money?
On paper, it may seem obvious. Still, many small business owners are too busy to perform these internal audits—and might miss crucial opportunities to trim fat and make key adjustments.
Focusing on Retention and Acquisition
As mentioned, downturns lead to less consumer spending, which means new customers might be harder to find. Even in the best economic situations, attracting new customers costs significantly more than maintaining current ones.
Instead of channeling all your efforts into lead generation, it may prove more profitable to double down on your existing customers. You might consider doing so by focusing on the following.
Feedback
Consumer feedback can prove among the most valuable data one has about their brand. One doesn’t have to run expensive campaigns to gather it, either. Instead, consider simply sending an email survey asking what customers do and don’t like. (Perhaps make it worthwhile by including a discount code if they complete the survey.)
Upselling
When calculating all that goes into finding new customers, upselling repeat customers can be significantly easier. You can leverage personalized content to attract them back with ways to improve or expand upon the products they’ve already bought. For example, a retail clothing store might offer new matching accessories for outfits their customers already own.
Research
There’s never a wrong time to consider a more in-depth study of your consumer base. What do they need? What are their pain points? How can your products address those issues? A little research can go a long way in molding your business model to new and evolving trends—especially during an economic downturn.
Opening a Business Line of Credit
Lenders tend to tighten their standards when the economy dips. This makes it harder to obtain loans when small businesses need easy access to cash. Preparation is the key to survival. Instead of waiting for an economic downturn, consider applying for a business line of credit today—even if you don’t need it.
Of course, it helps to ensure you have a solid business plan before taking out any loans. The more prepared you are, the better your deal will likely be.
Opening a business line of credit can prove a savvy business move in general. Why? Because you don’t have to tap the money if you don’t need it right now. Instead, it adds to your total credit amount, thus increasing your credit utilization.
Securing Capital During Economic Downturns
If your company sports a strong business credit score, you may gain access to more capital during an economic downturn. This may help you meet the new, stricter standards set by lenders, keeping several steps ahead of the competition.
New investors are also generally more attracted to businesses with good credit histories. Even during an economic downturn, investors often actively hunt promising start-ups and small businesses. It lets them pull their money out of the sinking stock market and into possible money-making ventures—a win-win for both parties.
Your suppliers often prove your friendliest creditors, as your success equals their success. Hard times make for a great opportunity to call vendors and negotiate more favorable terms. Perhaps consider offering to keep buying from them during this dip if they can increase your net 30 terms to net 90 terms. It’ll be another win-win—you get favorable terms, and they can move their materials.
Start Planning for Economic Uncertainty Today
An economic downturn can mark the downfall of any thriving business. But forming a flexible business plan and investing in new technology before the economy heads south can help put you in a better position to survive the effects.
No small business owner has to go through this alone, either. Reach out to Minnesota Bank & Trust, a division of HTLF Bank to start a conversation with one of our bankers today.
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