- U.S. economic growth contracted 0.9% in the second quarter, the Bureau of Economic Analysis reported on Thursday, the second consecutive quarter of GDP contraction.
- Two negative GDP numbers in a row are closely correlated with recessions for the U.S. economy.
- Business owners need to make cutbacks when the economy slows, but be wise about where they reduce spending when it comes to workers and long-term revenue growth.
With recessionary winds whirling, many small business owners have already cut back, but more trimming may be needed to weather the economic storm that's brewing.
U.S. economic growth fell 0.9% in the second quarter, the Bureau of Economic Analysis reported on Thursday, the second consecutive quarter of negative GDP. That will ratchet up fears that the economy has entered a recession, though it is not technically an accepted definition for that change in the economic cycle. Fed Chair Jerome Powell said on Wednesday he did not think the economy was in a recession.
Some small businesses have already been paring back, based on signals of a slowdown. A report released Thursday by the finance automation platform Ramp found that small business spending on electronics dropped by 59% between May and June. Many small businesses spent 28% less on shipping, 14% less on advertising and 11% on SaaS and software purchases over the same time period, the report showed.
"I advise my clients and followers on social media to pull back on all unnecessary spending to see what the economy brings with it in the second half," said Brian Moran, chief executive of Small Business Edge, which provides guidance to small enterprises.
Finding ways to trim fat without cutting into the meat of the business is a challenge for many owners. Here are three tips for surviving a recessionary environment.
Owners don't always know precisely what they are spending money on, so doing a self-audit is the first order of business. Use the last three bank and credit card statements to identify areas where you can make small, but meaningful cuts, said Carissa Reiniger, founder and chief executive of Silver Lining, which advises and lends to small businesses.
For instance, your business may have subscriptions to periodicals, apps, software or networking groups that are unused or underutilized. These costs can really pile up, especially if you're paying on a per-head basis. Also look at other recurring expenses, including phone services, utilities and bank account fees to see where you can cut back or eliminate certain costs, she said.
"I think the average small business could reduce their expenses by 20% without feeling a pinch," Reiniger said. Don't be afraid to negotiate. Especially in turbulent economic times, small businesses have more negotiating power, she said.
David Quinn, chief financial officer of banking fintech Bluevine, said small businesses should also negotiate with suppliers. When having these discussions, consider whether there is something else you can offer to your supplier that others are not. Also think about whether there is a deal you can establish that will help both sides, he said. Some suppliers may not be willing to broker a deal, but in that case, there may be other options to shave costs, such as discounts for bulk purchasing, he said.
Paring back on upfront expenditures can also be a prudent move. Peter Shieh, senior wealth advisor at Citi Global Wealth, has a client in the commercial lighting business who in the past might have kept six to nine months of inventory like bulbs and electric wires. Now the client is ordering three months ahead, at the most. The client also negotiated with suppliers to lock in rates for certain products. "With inflation, prices could be 20% to 30% higher in three months, so that's another thing they are thinking and planning for," Shieh said.
One tactic to conserve cash could be to pay bills closer to when they are due, versus 15 or 20 days in advance, or asking for a longer payment window, say 60 to 90 days, instead of 30 days.
Also look at real estate costs, said Matt Armanino, chief executive and managing partner of Armanino LLP, an independent accounting and business consulting firm. If your lease is up soon, consider whether you really need the footprint you have, given the trend toward hybrid or remote work. Or, if it's a long-term lease, is there an option to sublease a portion of the space?
For most small businesses, employee-related costs are a top expense, so it's an easy place to attempt to shave costs. Don't jump the gun. The cost to hire and retain talent is particularly high now, so letting people go unless you really have to can be "penny wise and pound foolish," Armanino said.
If you've tried other avenues and still need to curb costs, consider furloughing workers rather than firing them outright, said Joshua Oberndorf, a CPA at EisnerAmper. Let them know how valuable they are to your business and your intention to bring them back as soon as possible, he said.
You might also consider taking out a small business line of credit you can use as a short-term bridge, Shieh said. For this option, a small business might expect an APR of between 7% and 25%, on average, according to NerdWallet's Fundera. Although rates are higher now than, say, six months ago, it's good to have the lifeline to access if necessary, he said. There are also other options for small business funding, including friends and family, online lenders or funders and SBA loans.
Look to see what portions of the business can be automated or digitized. Maybe, for instance, you can deploy a chatbot to reduce customer service costs or switch to online training versus onsite. Armanino's firm, for example, did the latter and the move paid off within a few quarters.
Sometimes you have to spend a little money upfront to achieve longer-term cost savings, he said. This is true, even in a downturn, especially if the cash you're spending elsewhere can be redeployed for these purposes, he said.
There's a temptation among many small businesses to stop marketing activities in a downturn. Don't fall into this trap. Consider a study by McGraw-Hill Research that analyzed 600 companies from 1980 through 1985. The results showed that companies who stayed the course with marketing spending during two years of recession significantly boosted sales. And by 1985, those that had advertised aggressively during the recession had substantially higher sales than those that let advertising fall by the wayside.
"You don't want to shut down communications with customers; that's your future revenue," Oberndorf said.