The financial crisis of 2007-2009 can tell the prescient business owner how to prepare for any downturn that may be on the horizon.
The Great Recession was a difficult time to be a small business owner. In fact, the economic downturn of 2007-2009 led to the collapse of many small businesses.
The mood of that period was summed up by a slide in a presentation by a well-known venture capital firm.
It featured a gravestone with the words: “R.I.P. Good Times.”
That was just 10 years ago. Today, the economy is strong. The good times, it seems, are back.
But history has shown that an economy ebbs and flows. In fact, there’s talk that the growth we’re witnessing now is not sustainable and that another major slowdown may be just around the corner.
Downturns are hard to predict. But small business owners and entrepreneurs can certainly prepare for them.
I started working in venture capital two years after the Great Recession, when the economy was just starting to recover. Many of the entrepreneurs who survived were still licking their wounds, the majority were not prepared for the impact of a downturn. Now that I’m an entrepreneur, I can draw lessons from their missteps.
What to expect in a recession?
The first thing you need to do is to understand what can change for your business during a downturn. Based on what we went through a decade ago, you should expect several likely effects.
Capital and credit will be hard to come by.
Financing becomes a huge challenge during a downturn. That’s what happened during the Great Recession. Money pretty much dried up for small business owners. Traditional banks stopped lending to small businesses, which led to a wave of bankruptcies and distressed companies.
Your sales will suffer. If you’re a restaurant owner, brace yourself for fewer customers, as people eat out less at a time when eating out will be considered a luxury. If you’re a small manufacturer, prepare for a dip, or even a drastic drop in orders. Whether you’re a B2C or B2B business, expect sales and demand to be uneven at best, nonexistent at worst.
Some of your suppliers will have a harder time meeting your needs -- others will go out of business. If your business relies on a network of suppliers and vendors, chances are some of these companies, particularly the smaller firms, will also be wrestling with the same challenges. So be prepared for a possible disruption in your supply chain and your network of partners.
With all that said, we can also readily look back to discern actionable ways to prepare now for a downturn in the future.
Diversify your revenue sources.
The most vulnerable businesses in a recession are those that depend only on one or two sources of revenue or, worse, only one or two big customers. Diversifying your customer base and your revenue sources will give you more flexibility in weathering an economic storm.
Part of your game plan should be to have customers from different industries, because a recession affects industries in different ways. For example, you may own a consulting business and some of your customers are in the tourism industry, while others are in healthcare. Chances are your tourism customers will take a harder hit in a downturn, but you may still count on demand for your products or services from your healthcare clients.
Identify alternative suppliers, vendors.
Again, remember that some of your suppliers, vendors and partners will probably also take a hit in a downturn. You should plan ahead by identifying alternative vendors and suppliers, and making adjustments to your operations. If it makes sense for your business, it may even be smart to begin forming those relationships with different suppliers now, during good times.
Don’t over commit to high expenses.
When business is booming, it is tempting to spend more and invest in your business. In many cases, that makes business sense. Buying new equipment, renovating the office or even moving to a bigger space may be smart moves when times are good. But always think ahead and don’t overextend.
This is an especially important reminder when it comes to long-term expenses, like a real estate lease or a major contract with a software vendor. Avoid getting trapped in a long-term financial arrangement that could leave you vulnerable financially if the economy heads south.
Shop for and lock-in financing now.
Remember this basic rule: the best time to look for financing is when you don’t need the money.
Financing may become your biggest headache in a recession.
The best way to prepare for that problem is to secure financing now when times are good, and you’re actually in a strong position to be approved by a bank or a lender.
For example, getting a business line of credit when your business is strong and your financing needs are minimal is a smart move, especially with banks or lenders that charge you fees and interest only on the amounts you use. This is also a smart way to build your credit history. That good credit will be even more important when times are bad. When the economy is good, good credit means better pricing. When the economy is in the dumps, it means having relatively easier access to capital.
Needless to say, you must manage your debt wisely. It’s easy to secure financing during good times. But that’s also when people and businesses tend to load up on debt. And when the economy turns sour, those who are over leveraged or have taken on too much debt are the first to fall.
The temptation to expand and hire more people is also great when business is going well. And yes, in many cases, it makes good sense. As your business grows, you typically need more people to keep up with that growth. But expanding your workforce must be based on a well-thought out plan that should take into account the possibility of a bump or a downturn. That’s why it’s smart to consider having a more agile workforce, which includes freelancers and contractors.
Remember that layoffs don’t just disrupt your business, they can cause serious harm to your culture. Beyond lost investments, depressed stock valuations and foreclosures, the most heartbreaking stories to come out of the Great Recession involved people losing their jobs.
Laying people off certainly was one of the ways businesses survived the downturn.
But that event can be so traumatic, trying your best to avoid them is a smart strategy.