- Small business bankruptcies rose 74% during the Great Recession, with more than 1 million cases filed in federal courts in 2009.
- A business owner who had to shut down his firm but is back with a new one provides lessons learned and steps to prepare for the next recession.
If your company was open for business in 2008, then you undoubtedly remember the Great Recession. For small business owners, especially companies with less than $5 million in revenue, the effects of America's last major downturn were nothing less than devastating. Bankruptcies rose 74% in 2009, with more than 1 million cases filed in federal courts that year. Additionally, early stage entrepreneurship plummeted by over one-third from 2005 to 2009.
I personally remember the day I decided to shut down my print publishing company. It felt like an out-of-body experience as my eight years of being an entrepreneur were coming to an ugly end. The Great Recession claimed my business, along with hundreds of thousands of other once-thriving companies in the span of two years.
I missed the telltale signs of the coming recession (my personal economic indicators). In 2007 print advertising in my magazines started to plummet. That was the first red flag. In early 2008, my bank recalled my line of credit. Even though I was an excellent customer, they claimed that they were canceling most lines of credit as their company was sold to another bank — second red flag. In a monthly meeting with my business coach, in March of 2008, he looked over my financials and suggested that we pull back on everything (our conferences, the new website and three print magazines) except the one publication that was making money — third red flag. I chose not to listen to him and plowed full steam ahead into the tsunami of trouble waiting to knock over my business.
There are numerous examples of smart entrepreneurs who missed the red flags as well. I remember stories of builders who gave credit to homeowners and companies that eventually couldn't pay their bills, retailers who lost money when their largest customers went out of business and left them with unpaid receivables, and too many small businesses that signed long-term leases in office buildings and retail locations just before the Great Recession hit and then couldn't get out of them.
Fast forward to 2019 and the U.S. economy is riding one of its longest bull sessions in history. The economy is enjoying historically low unemployment in almost every major sector and group, and business owners are bullish as the country prepares for 2020.
In Capital One's recent 2019 Small Business Growth Index survey, business owners were asked about the potential for a recession. Nearly two-thirds (64%) of small business owners said current business conditions are good or excellent, while 43% said they are concerned that a recession will impact the success of their business in the next year.
"While small business owners are expressing some real concerns over a potential recession, they aren't allowing this kind of speculation to dampen their efforts to grow or invest in their businesses," Jenn Flynn, head of small business bank at Capital One, said in a release.
I applaud any business owner who is willing to meet adversity head-on and not let it keep them from reaching their intended goals. As Marcus Aurelius once said, "What stands in the way, becomes the way."
However, it's foolish for the same business owners to battle adversity without having a strategic plan, along with a backup plan, if they want to survive in one piece. Here are five ways to get your business ready if/when a recession hits our economy.
I cannot emphasize this point enough. Do you know what the red flags are in your business? They might include slow-paying receivables (see point #2), tightening credit lines, or even something happening upstream within the supply chains for your company. For example, if one of your suppliers is adversely affected by the tariff wars with China, you should expect your costs to go up anywhere from 10-25% depending on the products they supply to you. Whether through a relationship with a trusted advisor or on your own, establish alerts that will let you know when a red flag pops up.
This is true regardless of a pending recession. Every year brings some sort of downturn, whether it's a natural disaster or some other calamity. If you don't collect receivables in a timely manner, you run the risk of "net 30" becoming "net 60" or even "net … whenever I can get a check from the insurance company."
Don't wait for disaster to strike to realize that you should have paid more attention to your receivables.
What will your customers need if there is a downturn in the economy? If you don't have the products or services they might need, look for partners who can help provide it for them. For example, sub-lease a portion of your retail space to a vendor or another retailer offering complementary products or services to help defray rent or mortgage costs.
Maybe now isn't the best time to lock into a 10-year lease on new office space if you believe a recession could happen in 2020. Take time to look over your contracts and agreements. Is there an "out" clause? Can you re-negotiate agreements into annual contracts? Even if it means paying a slightly higher rate or fee, you will appreciate the flexibility if the economy slides into a recession.
Look at every segment of your business and ask a simple question, "What if?"
What if a recession hits our business? What if the bank pulls our line of credit? What if our largest customer goes out of business and takes our receivables with them? What if we lose our top salesperson?
It's a scary game to play but think of the alternative — asking these questions after the fact. By asking and answering the "What if" questions, you create an emergency plan. If something were to happen, there is no need to panic; simply take out the document you wrote and follow your own instructions on what to do. This approach can minimize downtime and limit bad decisions made during difficult times.
It's hard to accurately predict the future; it's easier to prepare for different scenarios. Hope for the best in 2020, but prepare, just in case, for an economic downturn.
—By Brian Moran, CEO, Small Business Edge