How to Recession-Proof Your Small Business in 2023

Here's how to give your business the best chance of surviving an economic downturn.

More and more economists are sounding the alarm bell about a potential recession in 2023. It may not happen, but as a small business owner, it's worth being prepared. Recessions can often hit small businesses harder because they don't have the same financial cushion against difficult times as larger companies do. However, there are steps you can take now to protect your business against economic difficulties.

How to recession-proof your business

Broadly speaking, a recession is a period of prolonged economic downturn. While they may not be pleasant to live through, they are part of the normal economic cycle; in fact, we've already seen three since the turn of the century. It's important not to panic and to remind yourself that this too will pass. Many of the steps below are about creating enough breathing space to survive until it does.

1. Plan out different scenarios

Sit down with your cash flow, balance sheet, and profit and loss statements. Your cash flow is particularly important, as it shows you whether you'll have enough money on hand to deal with different situations. You can use a cash flow projection to map out what might happen in the coming year and alter the parameters to see how you might fare. For example, try reducing your sales figures to see what would happen if several clients pulled away.

There are various accounting software solutions that may be able to help you, but you may prefer to work with good old-fashioned spreadsheets. However you're doing it, the important thing is to get a better sense of where you stand now, and how you will fare if the going gets tough. Try to revisit these calculations once a month to check in and take action if needed.

2. Identify areas where you can save money

Once you've looked at your cash flow and balance sheet, you may be able to see areas you can cut back. Perhaps there are savings you can make by streamlining your operations or finding lower-cost suppliers. If many of your employees are still working remotely, might you be able to switch to a co-working space and stop paying rent on an office? Look at your advertising costs and see how much you're spending on different marketing channels. Some areas might not be as effective as others, or might cost significantly more per new client.

3. Investigate loans and credit options

It's much harder to score a loan in an economic downturn. Sadly, banks know that small businesses could be at risk, which makes them more reluctant to lend money. Plus, many small businesses don't have a credit score because there are quite a few hoops to jump through. That makes it hard to access loans even when times are good.

You might be able to qualify for a business line of credit, which essentially lets you borrow up to a certain amount and only pay interest on what you borrow. Another option could be a business credit card, as it will factor in your personal credit score rather than the business one.

There are different types of borrowing, but as a general rule it isn't a great idea to borrow on a credit card to cover everyday expenses. However, one of the biggest risks during a recession is that cash flow can dry up. For example, you might find you're waiting for a late client payment, and your credit card could buy you some time.

4. Try to build up a business emergency fund

You're probably well aware of the benefits of having an emergency fund in your personal financial life, but have you considered creating one for your business as well? There is a tradeoff in business between investing money in your company's growth and tying it up in a savings account. You may also have already eaten into your cash reserves this year while dealing with the cost of inflation.

However, if you can find a way to put some money aside, it will considerably reduce your risk and could help you avoid taking on debt in order to survive an economic downturn. If you can implement any of those cost-cutting measures you identified earlier, that could help. Put that extra money into a separate account for your business emergency fund that you can access if you need it.

5. Don't neglect your relationships

Whether it is your employees, your clients, or your suppliers, people are more likely to be forgiving when things get difficult if you already have strong foundations. Perhaps you will need to make a payment slightly late, or cut the number of hours an employee is working. You know your people best, so think about inexpensive ways to generate goodwill. That might take the form of regular phone calls, small gifts at Thanksgiving or Christmas, or personalized new year messages. Speaking from personal experience, small, thoughtful touches can go a long way.

Bottom line

Even a small amount of planning now could put you ahead of the game if a recession does hit in 2023. The good news is that the steps above are worth taking even if we're not heading into difficult economic waters. Keeping on top of your cash flow, maintaining relationships, and ruthlessly cutting costs are all good habits to fortify your business against whatever the wider economy is doing.