The typical length of a US recession is about 15 months according to micro-investment firm Acorns and most recent economic reports indicate that the economy began to contract this past February as a result of COVID-19. March and April are expected to also show negative GDP growth, further confirming the U.S. economy is in recession. Due to the stay-at-home directive being put in place to slow the spread of the virus small businesses were hit particularly hard.
Because small businesses are in range of industries, some advice to small business owners to counter the impact of a recession may need to be specific to their industry. But here are five areas that are common to most small businesses that are important for a small business owner to focus on as a recession progresses:
- Protect existing customers: Landing new business during a recession is very difficult, so often competitors will attempt to lure customers in by offering discount pricing or some additional element of quality to a product or service that a current vendor is not providing.
The small business owner should put in extra effort to protect their current client base by increasing their communication with their customers to stay on top of any changes in their needs. A recession puts a lot of pressure on companies to lower costs. Some customers are explicit in what they are considering from a competitor, but if there is little dialog with the customer this opportunity to save the account may be lost.
- Delay signing long term leases or buying expensive equipment: In just a few first months of a recession, vacancy rates increase and a secondary market for the sell-off of equipment grows significantly as businesses close. Owners should consider delaying the signing of a lease to see if better rates will emerge, while exploring auctions as a way to upgrade equipment for a fraction of the cost.
- Have up to date financial statements: Bringing financial statements up to date can often take months to do, so a small business owner should work on their financials at the beginning of a recession to anticipate when they may need credit from a bank to hold them over.
- Review Advertising and Marketing Budgets: During a period of contraction customers cut budgets and delay purchasing decisions, so the return on investment of advertising and marketing typically goes down. This is may be an opportunity for a small business owner to negotiate better rates or try alternative marketing channels that offer discounts to do so.
- Have a Clear Credit and Accounts Receivables Policies: Bankruptcies go up during a recession and there often are hints by a company that they are having financial problems, but the small business vendor may not catch those hints in time. This sometimes happens because the owner does not have the bandwidth to keep on top of individual clients or there is a false sense of comfort due to the common and wrong belief that large corporations typically do not fail.
During recessions companies typically slow their payments to a vendor, so that is not a clear indicator of serious financial difficulties. So an owner should try to be aware of what is happening inside their client’s business such as signs of: employees being laid off or quitting and phone calls not being returned that previously were. Also they should be aware of any customer who begins to excessively complain about products or services, providing an excuse for them to delay payment, refuse payment or ask for a reduction in the invoice.
When the owner begins to see hints that a customer is having serious financial issues, they sometimes do not take action promptly because of two common mistakes:
They fear that asking about payment will jeopardize the relationship. That is possible, so it must be done tactfully and be well timed. When they procrastinate in calling their customer and then allow services or product shipments to continue, an even greater problem emerges as the amount of debt outstanding grows. Asking for greater clarification of payment intentions in view of a growing number of invoices should be understandable by a client, and if not, that may be the biggest clue of all that there is a pending problem.
The next mistake is not having clear terms and conditions in their sales contracts and therefore having an unproven collection process in the company. It takes a lot of finesse to handle a large client when their payments are coming in later and later. Some individuals have very strong skills in this area, nurturing payments from a large client without creating ill will.
Communication needs to be strong and consistent, gaining the cooperation and understanding of those writing the checks to adhere to terms or to a previously agreed upon schedule. The basis of strong collections is the right legal language in sales contracts and keeping clients close to stated terms before a recession, helping a small business avoid additional impact of a recession.
Read: Starting and Running a Business during a Recession Offers Unique Opportunities
