It's smart and proactive to plan ahead of a recession. For the most part, many U.S. businesses are still climbing out of the 2008 recession and there's still the possibility that we could fall right back into one within the next couple of years. There's significant uncertainty ahead of us as global economic growth remains subdued and the U.S. has yet to resolve key tax and financial matters related to the fiscal cliff. No matter what happens in the next couple of years, all entrepreneurs need to be prepared.
The first step is to review your financial model and perform scenario analysis. You may not be a financial wiz, which is okay, but you still need to understand how changes to your sales and expenses will impact your bottom line. Work with your accountant or hire a financial consultant to help you understand what the impact will be from varying degrees of recession. Of course, businesses with high fixed costs are at greatest risk, but each business model needs to be monitored for a five, 10, 15 and 20 percent decrease in sales. By performing scenario analysis now, you'll have a game plan for what needs to be done to maintain profitability and to sustain the business during a recession. It may be that a 10 percent loss of sales means that you need to lay off or demote X number of employees and close X number of locations. These decisions will need to be made swiftly and ahead of the storm, which is why you should create a plan now to which you can refer later.
The next step is to develop a strategy for maintaining key customer accounts. Many small businesses live and die with their best customers. You'll need to have a plan for maintaining those relationships through the recession. If you need to offer them a few discounts and freebies, so be it. It's worth it if you think it will strengthen your relationship and keep them onboard should the economy go sour.
One of the best times to take calculated risks is during a recession. In most cases, your competitors are thinking the same as you and hunkering down until the economy turns. Those companies that have a sizable cash cushion and access to outside capital may want to go on the offensive to take market share away from their competition. Stay focused on your core competency, but try to win over new customers with creative marketing campaigns and competitive offers.
Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, a professional network for small businesses and entrepreneurs to obtain trusted advice and services from a team of CPAs, Enrolled Agents, Financial Planners & Tax Attorneys. His team provides answers to the many finance and tax questions that small businesses encounter every day. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog.