As a business owner, you likely tend to your business the way you would a fiddle-leaf fig. You may dedicate extensive time, attention, and resources in your effort as it is among your most important financial assets. With due reason, as starting a business is the way many Americans create meaningful personal wealth.

In 2020, small businesses accounted for 43.5% of GDP and employed 48% of the US workforce. Now in 2022, recession concerns can be agonizing for business owners, but it would be a mistake to oversee the potential benefits. At a high level, a recession will force businesses to be more efficient and make difficult decisions regarding resource allocation. Preparing for the challenges in advance can put business owners in a strong position to survive a downturn and to thrive when the cycle inevitably turns to the upside.

Here are five steps a business owner can take to prepare for and survive a recession.

1. Plant the Seed: Create a Personal Financial Plan

Surviving an Economic Downturn 101: Take time to create a personal financial plan or to update your existing plan. 

Here are some things your financial plan should include:

• Snapshot of your personal income, expenses, and a balance sheet.
• Vision for how your business fits into your overall wealth.
• An answer to the question: How much money is needed to support your desired lifestyle and to ensure your financial security?

It may sound counterintuitive but securing your personal finances is often one of the factors that determine whether a business survives a downturn. When your personal objectives are addressed, you have a clear path to fully commit and focus on your business for the long term.

2. Hydrate Your Plan: Prepare Your Balance Sheet 

Strengthening your business’s balance sheet will provide you the resources to be opportunistic during all phases of the economic cycle. During rough times, it can be the difference maker.

As a starting point, you can look to the timeless saying “cash is king”. Having an appropriate level of cash reserve provides important flexibility. Flexibility that can be used to survive a recession or to take full advantage of opportunities that lie ahead.

Beyond the cash position, two items that play major roles in the strength of a balance sheet are scrutinizing capital expenditures and being mindful of how the business is using debt. When making a capital expenditure or taking on debt, a business should set clear expectations around the value those decisions will create. There should also be a healthy understanding of what strain they may create, should revenue turn down in the future.

Shaping your balance sheet takes time and resources but the effort will pay off immensely when the economic cycle changes.

3. Don’t Leave It In the Shade: Arrange Access to Capital 

Having access to additional capital during a downturn may be critical to ensuring your businesses has the resources needed to function. In some cases, if the downturn is prolonged, the additional capital could be essential to survival.

The time to line up borrowing capacity is when your business is financially sound and conditions are stable, not when the economy is heading downward, and confidence is low. If you do not have a strong relationship with a lender, take the time to establish a good banking relationship today. While you are at it, you will want to establish a line of credit to save you from any future stress along the road.

4. Check the Soil: Focus on the Business 

With a personal financial plan in place, a strong business balance sheet and access to additional capital you will be well positioned to focus your attention and resources on running your business. You should not only be on solid footing to preserve existing business but also have the opportunity to pursue additional market share, new team members and acquisitions that inevitably emerge during tough times. This ability to be on offense when others are playing defense is a hallmark of excellent and enduring businesses.

5. Prioritize Fertilizers: Take Advantage of Financial Opportunities

Last but not least, an economic downturn can create meaningful financial planning opportunities, particularly when it comes to saving taxes. 

Typical planning techniques such as excluding income or taking advantage of deductions and credits can take on a more important role during periods of fluctuating earnings. If your taxable income is down, accelerating income from high tax years and deferring deductions from low tax years can have a profound effect on lowering your total tax liability over time. It may go without saying but lowering your tax bill means more cash available for you and your business.

In regard to legacy planning, individuals projected to owe estate tax can leverage low asset valuations, including closely held businesses, to transfer assets to their next generation at lower values. Doing so would preserve more of their estate and gift tax exemption for future use. Leveraging low asset valuations can also place assets with significant growth potential outside of their taxable estate. 

To take advantage of these opportunities you will want to keep your financial plan up to date and maintain a consistent dialogue with your professional advisors. The right advisors with the right expertise may be able to surface significant savings for you and your business. 

Conclusion 

Predicting a recession is mostly an unrewarding exercise. Preparing your business to succeed during those tough times is a whole other story. Focusing on the main ideas of this blog can position your business to not only survive but thrive when the next recession arrives. Whenever that may be. Getting financial advice from an expert is also a best practice to make sure you and your business are prepared for economic shifts. You can find a financial advisor that understands your personal plan and supports your unique situation in Zoe.