Small businesses are the blood of the New Hampshire economy. Nearly all of the state’s enterprises are businesses with fewer than 20 employees. Further, just under half of all workers are employed in small businesses.
Despite the sizable impact of small businesses on our state’s economic well-being, these companies remain vulnerable.
Surviving a recession as a local business requires a combination of smart financial management, strategic planning, and legal protection. Although it might sound daunting, taking the step of formalizing your business, including learning how to create an LLC can provide the reassurance needed during tough economic times, allowing you to focus on keeping your business afloat.
Double down on what works
During a recession, every dollar counts. As a small business owner, you will need to ensure that every expense brings you the maximum rate of return. There are many ways you can streamline your processes and get the most value.
The Pareto principle is a common business concept that suggests that 80% of sales are made by 20% of customers. If you’re not sure who your best customers are, start by reviewing your sales data. Take note of customers who meet the following criteria:
- Tend to make large orders of high-margin products
- Have low rates of return or complaints
- Pay with cash or pay credit on time
Look for any demographic pattern in this customer segment. You may find that your most profitable customers are in the same age range, or have a similar level of household income.
Once you’ve identified your 20%, double down on the offers and services that attract them. You can create a targeted after-sales campaign to learn more about your most profitable customers.
Email or text-messaging-based campaigns are cost-effective methods of sending out special deals or requests for feedback. This can help you better understand and meet their needs. Then, you can create marketing and advertising plans that will attract even more of these types of customers.
On the other side of the coin, look into your least profitable customers. These are the ones that require significant discounts to purchase your products or buy small volumes of low-margin items.
The least profitable customers are also those whose needs eat into your bottom line. This includes customers who routinely require excessive customer support or request refunds.
Shifting your focus to your most profitable customers will often create disincentives for your least profitable customers. This is because the two groups tend to have different priorities when it comes to price sensitivity versus quality.
Shore up cash reserves
Cash is always king, but this especially holds true during a recession. Many small businesses flounder during economic downturns due to poor cash flow. Fewer sales often mean less cash on hand to cover overhead expenses.
Some businesses may choose to fill the gap with a low-interest business loan, but this solution isn’t ideal for every situation. If the margins get too thin, you may risk having to close your doors.
You can buffer your business from the effects of a recession by building a liquid emergency fund for your business. While the rule of thumb is to save the equivalent of at least 3 months of expenses, the actual number will depend on your business.
Building a cash reserve will require you to reduce some of your expenses. Take a close look at your unnecessary expenses from the past 6 months and see if you can make any cuts without compromising quality.
For example, you can reduce some of the inventory of your least-selling or lowest-margin products. You can also shop around for new vendors or services to find a better offer.
Tracking your cash is key to managing your reserves. Contracting with a provider of cash flow forecasting services can save you more money in the long run.
Invest in your business
When cash is tight, investing may seem like a bad decision. However, recessions are the ideal time for spending money in ways that will grow your business or improve your bottom line. For example, many businesses use downtime to make important repairs that would otherwise drive away lucrative foot traffic.
You can also take advantage of this slow period by investing in professional development. Consider enrolling yourself or your staff in a training course that would raise your business profile. Slowdowns are also an ideal time to implement disruptive changes, such as upgrading IT infrastructure or installing a new point-of-sales system.
