Are we headed for a recession in the next year? Are we not?
Let’s leave the economic theory and mysticism to the talking heads, but one thing seems clear - depending on where you get your news and what day of the week it is, economic experts appear to be divided over whether or not another recession is imminent.
But here’s what I find amusing - even if economists have enough information to make smart predictions based on historical data, no one can know for sure when another event will impose new pressures on the market. And I mean big events, like a virus that effectively shuts down the world for a big chunk of time. Or Russia invading Ukraine. Or a giant asteroid heading straight for Earth.
Okay, that was a little dramatic. But you get the point.
To be fair, economists should try to keep guesswork out of their predictions. How could they possibly account for an infinite number of unknowns anyway? It’s definitely better that they make predictions based on the observable data they do have.
But what does that mean for the rest of us? How can we best prepare for future economic turbulence that will eventually come?
Fortune favors the prepared
No, I’m not going to advocate for a bunker filled with 10 years’ supply of rice, water, and bullets. If that’s your thing, though, go for it!
However, wisdom and prudence both dictate that preparing as much as possible for difficult times makes good sense for your business. That’s one of the big lessons many small businesses learned over the last couple of years - be prepared, because we don’t know when more difficult times will come.
So, how can your business be prepared for the possibility of another recession (or worse), even if one doesn’t come for another 5-10 years?
Here are three things you should be doing right now to strengthen your business. They aren’t sexy or complicated. In fact, they’re actually kind of boring. But they are guaranteed to work.
1. Pile up cash
Having a stockpile of cash on hand makes sense for so many reasons. For today’s purposes, extra cash can turn what would otherwise feel like an emergency for your business into just a bump in the road.
For a lot of businesses, it wouldn’t be uncommon for sales and revenues to take a dip during a recession. When you’ve got plenty of extra cash on hand it leaves you with peace of mind, knowing that you’ve got plenty of runway to keep your operations funded. That peace of mind comes with the luxury of taking enough time to make sound decisions while everyone else is freaking out.
How much cash should you have? Ideally, you want somewhere in the range of 3-6 months of operating expenses saved up. If your business is low-margin or really cash-intensive, then 6 months may be difficult to accumulate, but it’s still a noble goal.
To determine just how much cash to save up, you’ll want to take an average of your monthly operational expenses including your own wages and associated taxes.
Next, you’ll make it your goal in life to set aside as much cash as possible until you’ve built up your cash holdings into the 3-6 month range. In business terms, this cash reserve is called “retained earnings”, and it’s the money that is left over after you’ve paid yourself your base wage and you’ve paid all your operational expenses.
Don’t forget, because this is important - you also need to set aside money to pay taxes. All money that goes into your retained earnings is potentially taxable, so you need to accommodate for that. 50% of what’s left over to taxes, and 50% to retained earnings.
2. Eliminate debt
I won’t go down this rabbit hole today, but building your business with debt is always a bad idea. In good times, who needs the bank to be siphoning off what could otherwise be profit?
But it gets much worse when you think about trying to endure the lean times of business during an economic slump or recession.
Slower sales and lower revenues are hard enough. Trying to pay the bank or another debtor at the same time is way harder and far more stressful. Don’t volunteer for some leech to suck the lifeblood from your business!
If you already have business debt, then you should get rid of it as quickly as possible.
Here’s a good strategy for saving cash and paying off any business debt you have.
Take the money that is left over after you’ve taken care of monthly business expenses, your own moderate wage, and taxes. You can play with the percentages here, but I’d recommend saving 30-40% of what’s left into retained earnings. Take the remaining 10-20% and aggressively pay off the debt.
If you save up the 3-6 months of business expenses in retained earnings first, then go ahead and put everything toward paying off the rest of the debt. If you finish paying off the debt first, then put it all toward saving up the 3-6 months of cash.
Here’s the truth: there is zero risk to having a pile of cash and no debt! Life brings enough risk that you can’t control, so why add to the pile with debt you can control?
In lean economic times, you’ll have enough to worry about with regular operational expenses and paying yourself. Don’t pay the bank, too!
3. Change your mindset
Have you ever noticed that it’s easier to make good decisions when you’re not faced with circumstances that test those decisions?
It’s easier to decide ahead of time that you’ll choose the oatmeal and fruit at the next breakfast buffet you attend… when there’s not a table full of donuts in front of you.
So choose now to change your mindset for the next season that will challenge your business financially.
Here’s the mental shift I want you to make: where others see constraint, I want you to see opportunity.
This may sound subtle at first, but trust me, making this shift in how you view the world can have massive implications for you and your business.
Ultimately, this comes down to asking better questions. Instead of ”Why me?”, try asking ”What does this make possible?”
“One of the best questions you can ask when something negative happens is this: What does this experience make possible?” Living Forward,
This is easiest to illustrate by example. During the pandemic, there were three types of restaurant owners:
- Those who bemoaned the circumstances that had befallen them and waited at home for things to get better - many of these restaurants didn’t make it and eventually closed.
- Those who did their best to work within the confines of the system and hoped they could make it work - many of these restaurants didn’t make it either.
- Those who asked, “What does this make possible?” These businesses are the ones that turned would-be disaster into a golden opportunity. Many of these businesses emerged from the pandemic season far better off than they’d been before.
These folks changed with the challenge - with outdoor seating, drive-up takeout, mobile ordering, and many other creative ways to keep operating.
I’ll bet you don’t have to look very far to see an example of each type of restaurant where you live.
So, decide today while economic times aren’t so bad - how will you view the next economic difficulty when it comes?
How this will make you money
At first, this might seem obvious, but I think there’s a lot more to how this post could make you money than immediately meets the eye.
First the obvious things:
- If you’re not paying the bank, you get to keep more for yourself and your business.
- If you have a stockpile of cash, your business will be more resilient against lean seasons in our economy because you’ll have a minimum of 3-6 months of runway. You can likely stretch that cash on hand to keep you afloat for more in the range of 6-12 months unless all of your revenue dries up and you don’t tighten your belt at all.
The less-obvious things:
- In the face of economic difficulty, having no debt and a big reserve of cash is a distinct marketplace advantage. While other businesses are likely going to be worrying about how to keep the lights on, you’ll be free to look for the silver lining by asking, “What does this make possible?”
- That pile of retained earnings is not just a rainy day fund. It’s also your war chest for growing your business. Have a major capital expense you need to cover? You’ve got cash! Did one of your local competitors decide to sell their business and you’re interested in acquiring it? Cash!
- Operating on cash limits the scale of the mistakes you can make. When you borrow money, it enables you to make mistakes with more zeroes on the end. But two inherent limitations come with cash:
- You can’t spend what you don’t have.
- We tend to be much more careful with hard-earned cash that we worked to save, meaning you will be inclined to only spend it on opportunities you feel confident in.
- A close relative to the first item on this list: no debt and a pile of cash will give you peace of mind all the time, not just during a recession. This means that deep down in your soul you’ll be free to bring the best parts of your mind and heart to growing your business with confidence.
Another recession will come. When? That’s anybody’s guess, but probably in the next 5 years if history is any indicator.
Take the opportunity you have right now to prepare! Your future self will be really glad you did.