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The word “recession” sends a little bit of panic into anyone’s heart. What does that mean for the housing market? What about jobs? Food prices? It rarely conjures up anything positive. And when you own your own business, it can feel even more unsettling. How can your business prepare for a recession? Can you handle the ripple effects of a downturned economy? Will your services or products still be in demand?
The best offense is a strong defense when it comes to sports and entrepreneurship. If you can put systems in place before a pending recession, your small business will be better prepared to weather the economic storm.
The strongest element in your business toolkit you have to prepare for a recession is accounting. Accounting includes your bookkeeping and financial reports that, when combined, can help you forecast and understand your business’s strengths and weaknesses.
So these are five ways how bookkeeping can help you prepare for a recession.
Utilizing your financial reports can help you understand past business performance and future trends. Take a look at the “big three” financial statements for your business to get an overview of how your business is performing and how you can prepare for the future.
Understanding your income and expenses can help you prepare your business for a recession. Take a look at your income statement. Your income statement shows the expenses, revenue, gains, and losses of a company during a given timeframe. It can help you identify which clients generated the most revenue. You can then target your resources to help and expand those clients.
Your income statement can also help you identify your largest expenses. If you are looking at the past year, for example, highlight where you spent money and if you are able to decrease those expenses for this year. This could include canceling subscriptions you don’t use, negotiating with vendors, shopping around for other services, or consolidating your resources.
If you break up your income statement analysis into quarters from last year (January-March or July-August, for example). You can compare what times of the year you were the most profitable and when you spent more money. You can use this information to plan accordingly for the upcoming year. Then head to your cash flow statement.
Your cash flow statement is a deep dive into the movement of cash in and out of your business. This will also help you identify projects or clients that provide the most revenue so that you can focus on those as you prepare for a recession.
By studying your cash outflows you will be able to identify inefficiencies in your business that are of a high cost. You can change your operations to be more efficient and spend less cash. Reserved cash could be put into savings for lean times when either sales or services are not in high demand.
Your cash flow statement can be particularly useful in identifying patterns of low or high cash in your business. Use this information to prepare accordingly.
Your balance sheet details the assets and liabilities of your business, as well as your equity in the business. The balance sheet shows the assets owned by your business, such as cash, accounts receivable, inventory, and equipment. By analyzing these assets, you can determine which ones can be converted to cash quickly in case of an emergency. This information can help you build up your cash reserves, which is particularly important during a recession.
The balance sheet also shows the liabilities owed by your business, such as loans, accounts payable, and credit card balances. By analyzing these liabilities, you can determine which ones need to be paid off quickly and which ones can be deferred. This information can help you prioritize your debt payments and manage your cash flow during a recession.
Fixed expenses are the cost of doing business that does not change based on your level of production or sales. This includes, but is not limited to:
To evaluate your fixed expenses, determine what is essential vs. non-essential. This could look like deciding what software services you really need or negotiating with vendors on costs. Looking for deals or lower-cost options can help you preserve cash as you prepare your business for a recession.
Variable expenses change based on the level of sales you have in your business. If you are producing a physical product, naturally the cost of supplies will rise as you produce more. If you are a freelancer, your variable costs might look like:
To manage your variable expenses, evaluate what is necessary and what can be downgraded or removed completely. Sometimes even switching vendors can get you a better price on software or services.
As you track and analyze your expenses, you’ll be able to have a clearer picture of where your money is being spent and how you can create a budget that allows you to prepare for a recession.
Now that you have been able to identify what elements of your business generate the most revenue, you can focus on delivering a high-quality service or product to your customers. Use this information to become an expert in your field.
As you hone your craft, consider how diversifying your offers could benefit your business. Diversification can be a solid safety net to make sure that you are able to generate income in multiple ways should one area of your business starts to suffer.
This doesn’t mean that as a copywriter you should start offering graphic design services. Instead, find adjacent skills that are in demand and that can offer new or existing clients an opportunity to work with you.
In many cases, this looks like offering a physical or digital product that can be purchased outright. Especially if you are focused on providing top-tier services, this tool can be an introductory offer for clients looking to learn from you.
If you want to introduce another service to new and existing clients, look for an opportunity to add something that they would be interested in. For example, if you are a social media manager, you might offer to assist with newsletters or blogs. If you wanted to offer a physical product, you could sell templates or caption prompts.
There are numerous ways to build out a robust offering that keeps you on track toward your professional goals, but also helps you attract and retain high-paying clients. Diversifying your offerings can help you prepare for a recession by being more flexible to new opportunities.
Completing steps 1-4 will help you find opportunities to increase your cash reserves. This is key to helping your small business prepare for a recession or slow periods of work.
If your income is consistent now, it is a great time to start putting money aside for when times are more difficult. As a freelancer or small business owner, you should be saving for these three areas.
Since you don’t have PTO, it’s wise to put away money for when you plan to take a vacation as well. Depending on how your online business bank account structures things, you could easily set up automatic withdrawals to fund your savings account.
To prepare for a recession, assess how much savings you would need for 3 to 6 months of wages and consider that a starting goal for your savings balance. You could also renew or reassess all client contracts and make sure they are under contract for the next year or so. Then you will also know when to expect a decline or increase in revenue.
Believe it or not, you could consider networking as a safety net for cash reserves. If you have a robust network of colleagues and potential clients, you always have somewhere to find your next gig. This speeds up your client acquisition time and prevents you from being without work for too long. Invest some time building your online network to keep potential work within reach.
There’s no way to completely predict macroeconomic conditions or how they will affect your business. The best thing you can do as a freelancer or small business owner is put small and smart habits to work for you. Protect yourself by being wise about your financial decisions, staying consistent with your bookkeeping, and being mindful of the future.
If you want the support of an expert team of bookkeepers to keep your finances strong and healthy, book a free bookkeeping consultation.