Why a recession matters for small businesses?

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending. 

 

Practically speaking, business slows, projects get delayed, and smaller businesses are often strapped for cash because customers may delay purchases or payments for longer than usual, often because they are waiting for income to arrive themselves. This causes a chain reaction of delayed payments from one vendor to another, which typically slows down all aspects of the business.

 

As Ayşegül Şahin, Sagiri Kitao, and Anna Cororaton at Federal Reserve Bank of New York’s Research and Statistics Group wrote, “The 2007-09 downturn has had a deeper employment impact on small businesses than on large ones. Small firms attribute the relatively steep decline in jobs mostly to poor sales and economic uncertainty — problems that also affected large firms, but to a lesser degree. 

 

Tightened access to credit and adverse financial conditions also constrained small firms but a more important factor was the decline in new investment and associated financing in the face of weak consumer demand for the firm’s products and services.”

 

This is pretty typical, this is known. What is also increasingly likely, is that a recession is on the horizon. We wrote about this a few weeks ago. We also noted that preparation is key

 

Of course, there are many challenges during a recession. But there are also plenty of additional upsides for small businesses during a downturn, particularly those that have squirreled away some cash for just this occasion.  A recession can actually be good for your business if you prepare. 

 

As the economy slows, small businesses can expect to see a softening in their core material costs, which have skyrocketed during the past two years because of supply chain issues and fuel prices. This is good news for contractors who have already been awarded projects. Those that bid in the spring will likely be asked to rework their numbers for the fall. 

 

The Federal Reserve’s slow-but-steady war on inflation will crimp demand for wood used in the home-building industry, sending prices down by almost 50%, experts say.

 

Building materials prices increased 20.3% year over year and have risen 28.7% since January 2020. Over the past four months, the index has climbed only 8.4%. 

 

In the previous few months, the increase began reducing due to the slowdown in the housing market, which; after more than a year of soaring demand, exploding home prices, and increasing real estate sales, is finally cooling off.

 

“The housing market isn’t crashing, but it is experiencing a hangover as it comes down from an unsustainable high,” said Taylor Marr, Redfin deputy chief economist.

 

As a result, year-over-year home sales have been dropping in recent months.

 

Aware small business owners who have been through economic cycles before know that a downturn won’t last forever and can leverage it to their benefit, but you’ll need to make sure certain things are in place first. 

 

Business owners who want to keep the core of their business strong and viable throughout the next 18 months know to use scalpels, not a chainsaw, when dealing when cutting costs. 

 

And the smartest small business owners aren’t panicking, they are preparing. They’ve been to this rodeo before. And, assuming they’re beginning to organize their plans and freeing up capital, they seize the opportunities within this downturn to their advantage.

 

Here are a few ways recessions work for those who are prepared:

      1. Competitors go out of business. 
      2. Assets and property become more affordable. 
      3. Mergers and acquisitions (M&A) deals are more attractive.
      4. Landlords are more willing to negotiate lease rates to keep their tenants.
      5. Employee turnover declines and productivity improves as people fear for their livelihoods.
      6. Governments don’t increase taxes during economic downturns.

 

Warren Buffett once said, “I think the most important factor in getting out of the recession actually is just the regenerative capacity of American capitalism.” This is true. A recession is coming. It’s likely already started. 

 

To raise the odds of success in the next 18 months, forward-looking management teams can map out a series of offensive moves that aim to create a stronger business through the downturn and beyond:

      1. Start with the end in mind. What do you want the company to look like at the end of the downturn and three years after? A future-back approach that defines the desired end state helps you know exactly where to invest in the customer segments to target, the value proposition, and the digital technologies supporting the business. A clear plan lays out specifically how the business will outperform competitors through and beyond the downturn.
      2. Manage costs, now. A smart cost program starts early and focuses on sustained changes, instead of cutting muscle or trimming across the board. Use a scalpel, not a chainsaw.
      3. Stress test the P&L and balance sheet. Model your P&L, cash flow, and balance sheet through turbulent scenarios, including negative market growth, lower prices, and higher unit economics, for your company and against your competitors.
      4. Identify M&A targets early. Map out a proactive M&A plan that includes add-on acquisitions, releasing non-core assets, and potentially big moves with large-scale peers. That way, you can pull the trigger when the time is right, as opposed to reacting and missing the opportunity.

 

The magnitude and shape of a cost transformation will vary depending on your starting position, but the approach should keep out costs while you put the pedal to the metal coming out of the curve.

 

If you’d like help in planning for the next 18 months, reach out to us!

Author

  • Vivian Mandala is the founder of CMC Network and has worked in NY Construction for over 20 years, most of which was as a Contractor. She is now a Construction Business Coach. In 2017 Vivian, along with a group of dedicated Contractors, CM’s, GCs and Developers, started CMC Workforce, a long term in depth construction training program. Vivian enjoys the personal connections she makes through her coaching and seeing the lasting changes that she sees her clients benefit from year after year.

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