Young business owner thinks about the impact of a recession.

Recession-proof your small business

Is Canada currently in a recession? Although some small businesses have seen a pullback in sales, technically speaking, we aren’t in a recession just yet. And in most cases, we don’t know we’re in a recession until it’s over. A new study from RBC suggest that a recession is almost inevitable, and we could see an economic downturn take effect as early as Q1 of 2023 (one quarter earlier than their previous projection). It’s also estimated that the average Canadian household will lose $3,000 of its purchasing power due to higher prices and interest rates. As fear and uncertainty continues to spread, small business owners are left wondering how they can recession-proof their business.

What Exactly is a Recession?

A recession is a significant, widespread, and persistent decline in economic activity. From a technical standpoint, most economists agree that it constitutes two consecutive quarters of negative economic growth (GDP). You will often see declines in economic output, a rise in unemployment, and retail sales fall sharply. Depending on their severity, recessions can last for months or even years. Recessions are a natural part of our economy and are considered healthy, if not necessary. Learning how to manage the ups and downs of an economic cycle will set up your small business for future success.

Here’s a visual representation of Canada’s GDP growth (as of Q1 of 2021):

What Causes a Recession?

All recessions have different causes and effects, but tend to be similar in nature. The most common causes include:

  • Price Fluctuations: rampant inflation or deflation
  • Uncertainty: an unexpected economic shock (i.e., pandemic)
  • Speculation: stock market or real estate bubbles
  • Interest Rates: rate-hike cycles

Recessions can alter in lengths, and the longer they are, the harder it is to reverse its effects. They also increase the risk of an economic depression, which is considered an extreme fall in economic activity that can last for years. That said, the federal bank predicts that Canadians are in for a mild and short-lived recession, one that can be easily reversed once inflation has been successfully tamed.

Strategies to Recession-Proof Your Small Business

Need-oriented businesses like daycares or healthcare are usually born with the ability to handle recessions. That said, the ability to survive an economic downturn isn’t limited to just those types of businesses. You can take proactive steps in ensuring survival during the harshest of recessions. Implement these strategies now to come out stronger than ever before the next economic cycle.

1. Nurture Your Current Customers

During a recession, it’s normal for consumers to cut out on non-essentials. Avoid being on their list of budget cuts. As customer acquisition becomes increasingly difficult during a recession, existing customers can be an invaluable lifeline. The pandemic altered and expanded the way small businesses interact with their clients and ushered in new consumer expectations. Businesses are now required to be tremendous communicators and available to address any minor issues at all times. Provide a consistent quality experience and be sure to give space to your customers to provide feedback. By showing them how much you value their input and support, they will keep coming back for more. In fact, 89% of consumers consider customer service as the driving factor for repeat business.

2. Work on Your Business Credit

As the economy slows down, creditors become more stringent when it comes to lending money. A strong business credit profile is the foundation for demonstrating your business’s worthiness to a potential lender. While it’s not a given, there’s a good chance you may need additional financial during a recession. If you don’t have a business credit card, consider one to separate your personal credit score from your business score. And as simplistic as it may sound, make your payments on time. It’s the single and most important thing you can do to boost your score. Your business needs to be as appealing as possible so that if the need arises, you can borrow money quickly.

3. Establish an Emergency Fund

An emergency fund is always a good idea and can offer peace of mind during an economic downturn. We get it – it’s a challenge to set aside some cash every now and then, especially during inflationary times. One way of going about it is cutting cost where you can and setting aside those savings for a rainy day. Look at your subscriptions or anything that you pay on a contractual basis, such as unnecessary services or features. Is there anything you don’t really need? Are you overstaffed? As unfortunate as it may be, layoffs are often synonymous with recessions. Fundamentally speaking, labor is often the largest costs for employers. Consider downsizing if you can to be in a better position to save. Start building out your emergency fund now while business is relatively stable.

4. Know Your Numbers

Understanding and monitoring the current state of your business’s financial health is key to navigating an economic downturn. Work with your accountant to assess the financial health of your business and go through ‘’worst-case’’ scenarios to see if your business could weather the incoming storm. Use KPIs related to cash flow, debt, operating expenses, net income and inventory. These figures will provide you with a better idea of how your business is performing right now, and the confidence to take proper action heading into a recession.

5. Never Stop Marketing Your Business

When it comes to budget cuts, many businesses will point the finger at their marketing department first. Although it may be an easy fix, it’s often not the best approach to take. Nurturing your current customers is important, but you don’t want to miss out on potential new ones either. Most businesses will cut back on promoting their products or services during a recession, take advantage of this leaner market and double down on your efforts. If you don’t have any choice but to cut down on marketing, explore free alternatives like social media. Use this recession as an opportunity to build up your online presence and to embrace digital transformation.

Final Remarks

Smart business owners know how to handle the ups and downs of an economic cycle. As scary as a recession may sound, use it as a learning opportunity. Look for areas in which you were maybe overleveraged or over-invested. More importantly, do the best you can to survive and know that a contraction is always followed by an expansion.