How do I prepare for a downturn?

Business owners are grappling with heightened concerns with 26% of small business owners who responded to Truist's 2023 survey of 518 small business owners (Truist's 2023 Small Business Survey) feeling stressed about economic uncertainty.^{Disclosure 1} Identifying the potential scenarios that are most relevant to your business and taking measures to prepare for each can reduce worries and position your business to succeed.

Look at the following scenarios, and work on plans for what you’ll do if they happen.

Scenario 1: Declining demand

Even if consumers are merely concerned about the possibility of a recession, you could see a decline in demand for your services or products. Higher interest rates may also cause customers to cut back on spending and conserve cash.

Actions you can take

• Focus on core competencies. Take the time to reassess the products and services you offer. Identify areas where customers are likely to reduce spending during an economic downturn. Consider diversifying your products or services to cater to different customer segments or needs, making you less vulnerable to a decline in sales in any one area.
• Provide value-oriented offerings. Consider offering lower-cost alternatives that appeal to both new and existing customers who are seeking ways to save. Explore giving customers incentives, such as discounts for pre-payment or packaged pricing on a bundle of several offerings, to gain sales.
• Invest in marketing and sales. According to Truist's 2023 Small Business Survey, leaders of small businesses with increasing revenues between 2021 and 2022 are twice as likely as companies that have not grown or have seen decreased revenues to invest in sales staff, distribution channels, and new or enhanced products.  Increasing marketing efforts can help attract new customers, especially when competitors are scaling back. Investing in customer service can also help strengthen customer loyalty and retention, essential for a business’s long-term growth and profitability.
• Develop contingency plans based on revenue. Anticipate revenue that might be at risk, and establish plans to reduce the impact of any reductions. Consider delaying capital expenditures or exploring refinancing options that can stretch your cash.

Scenario 2: Rising costs and inflation

Your business may face mounting pressure from rising costs and inflation, which can erode profits.

Actions you can take

• Adopt a deliberate pricing strategy. Instead of following competitors or market trends, consider strategically evaluating your growth goals and devising a pricing strategy aligned with achieving them. As your competitors increase prices in response to rising costs, you may have an opportunity to attract price-sensitive customers. Alternatively, it may be more advantageous to focus on market segments that will pay more for a premium service.
• Align expenses with sales. Reducing the time gap between expense outflows and revenue inflows can be especially important during inflationary times. Consider streamlining operational processes by adjusting staffing levels or overtime, scrutinizing discretionary expenses, and finding savings by reviewing ongoing charges for software subscriptions and other services.
• Accelerate payments. If possible, consider collecting payment at the time you deliver goods or services and be conscious of your customer’s ability to pay if you extend terms. Accepting digital payment options, including credit cards and direct digital wallet transfers, can both enhance customer convenience and expedite receipt of the funds.
• Negotiate payment terms with vendors. Consider engaging with suppliers to negotiate more favorable payment terms, such as extending your payment period, accepting partial or deferred payments, or increasing the discount on early payments.

Scenario 3: Rising interest rates and tightened credit conditions

Escalating interest rates make borrowing more expensive and access to credit more challenging. It's important to plan so that your business can stay ahead of cash shortfalls.

Actions you can take

• Secure business lines of credit and business credit cards. Anticipate potential future lending needs and consider applying for access to credit that can help you though the ups and downs of cash flow. Cultivate long-term relationships with banks and maintain a healthy business credit score.
• Prioritize debt repayment. Consider paying down existing high-interest or variable-rate debts promptly to avoid burdensome interest costs.
• Diversify sources of cash. Plan ways to get cash into your business if it’s needed. Build relationships with potential investors and identify assets that can be leased or even sold.
• Regularly forecast and monitor cash flow. In times of uncertainty, a proactive approach to cash flow forecasting and monitoring is crucial to making informed financial decisions that help avoid cash shortages.

Scenario 4: Tightening labor force

A constrained labor market poses challenges in finding qualified workers, potentially increasing labor costs.

Actions you can take

• Invest in automation. Consider adding technologies that automate your business processes. The companies in Truist's 2023 Small Business Survey that are growing revenues are 43% more likely than those businesses that aren’t growing to adopt or expand technology related to customer service and communication.
• Explore incentives to retain existing workers. Sixty-nine percent of business owners who responded to Truist's 2023 Small Business Survey took actions to keep employees. To retain your staff, evaluate non-monetary benefits that can contribute to employee satisfaction and loyalty, such as work flexibility, extra time off, and career development support.
• Fine-tune labor needs. Seek ways to reduce or redirect labor requirements, such as scaling back work hours or using contract workers when appropriate.
• Establish short-term worker contracts or delivery terms. Consider fostering flexibility with contract workers by negotiating short-term contracts or delivery terms that align with your evolving business needs.

“While these scenarios may not occur simultaneously or pose equal risks, developing an action plan that addresses these possibilities ensures that you’re prepared for any economic situation,” said Scott Stearsman, head of small business for Truist. “These strategies not only safeguard the health and growth of your business, but also cultivate resilience and adaptability, enabling you to navigate uncertainties and emerge stronger in an ever-changing economic landscape.”