The word recession causes a myriad of reactions from small business owners. As we work to prepare our clients for recessionary times, we see reactions ranging from complete dread and panic to a casual nonchalance and dismissive attitude. Regardless of the reaction, being prepared and having a plan is the key to surviving economic downturns!
A recession, according to the National Bureau of Economic Research, is: “a significant decline in economic activity spread across the economy, lasting more than a few months.” The NBER labels a recession after two consecutive quarters of decline of GDP. [1]
A recession is different than a market segment downturn in that it affects the whole economy (or the vast majority of the national economy). A recession is different that a depression in that a depression is typically a series of recessions in a row, typically lasting years. [2]
[1]https://www.investopedia.com/articles/economics/08/recession-affecting-business.asp
[2]https://www.thebalance.com/recession-vs-depression-definition-causes-and-stats-3306048
As described, a recession is an economic downturn. But, what does that mean? Typically, a recession lasts six to twelve months. During a recession, the economy sheds jobs: lots of jobs!! Usually, the market loses 3 to 4 million jobs during an average recession. It is also normal for the stock market to contract severely in a recession. [1] After all, less economic growth means less profit, less profit almost always means less employees, less employees and less profit means business are worth less: thus a stock market slowdown. Small businesses may see revenue plummet as unemployment drains purchase power from their consumers. They may be forced to lay off workers themselves, or reduce their prices in order to remain competitive as money gets tight across the board. A vicious cycle of falling revenue followed by labor reduction followed by more followed revenue can spell death for a business of any size.
Yes, we truly realize how cliché this sounds. However, it is an absolute necessity! Plan your moves! Meet with your team: schedule meetings with your accounting team, your financial planners, your unit managers and PLAN your way through any economic downturn. Make sure you and your team knows the margin on their products, the labor costs of their services, and the efficiency and strength of each member of the business.. The best time to start planning is yesterday, but today is better than never.
While cash is always important; it is especially so when markets slow down. Cash constraints affect large and small companies alike, but are typically harsher realities for small businesses. These small businesses do not typically have the following things that larger companies have, which enable them to better weather economic slowdowns:
Cash Reserves – Most small business owners defer or delay portions of their pay and roll that cash into the company to pay for operations or expansion. Many small businesses do not have cash reserves to survive a medium to long period of economic downturn.
*Please notice, as we said most small businesses do not have these items, we list them because you can have portions of these or all of them!
Excess Assets – excess assets can be sold to raise cash or taken offline to save cash. Most small businesses do not carry excess assets.
Contracts with Exits – many large companies negotiate contracts that give them flexibility. These flexibilities include options to lower minimum order requirements, options to break contract with a greatly reduced breakage fee, and opportunities to negotiate longer repayment terms with vendors.
What can you do:
Access to Capital – Larger, and especially public companies, do not operate at their full lending limits. This allows these companies to borrow through economic changes. Large and public companies also have the option to sell shares to raise cash.
What can you do:
1. Reduce Costs
1.1 Reduce Staff
As a business owner, difficult decisions are what you signed up for. Remember, if the business doesn’t survive, everyone gets laid off. Make selective cuts that allow the company to survive.
2. Stretch your payment terms to vendors
3. Offer incentives for your client payments
These cash management activities help “turn the cash cycle”. Cash cycle issues plague small businesses in good times. They are ESPECIALLY difficult in a recession. Managing the cash cycles helps a company ensure they are bringing in cash at an equal to faster rate than they are sending cash out.
Often, companies offer payment terms to clients (Net 15, Net 30, etc), yet do not have payment from terms for their suppliers (or have short terms). This creates a negative cash flow cycle. The business maybe profitable, but it is spending cash (paying bills and buying inventory) faster than it is collecting on sales from customers. The steps above will help a small business turn their cash cycle to
Other cost savings measures to be considered:
1. Diversifying your revenue
2. Investing in marketing your business with social media ads, email campaigns or videos.
To some this seems counter-intuitive, but during economic downturns, the first thing a lot of businesses do is slow their advertising essentially turning off the spigot that was pouring new customers into the top of their business model. As less businesses spend on social media ads, ad placement gets cheaper, allowing smart business owners to gobble up the additional real estate at a massive discount.
3. Take advantage of your assets: if you have unused office space, consider renting it out.
It is never too late to plan for a recession. By implementing these action-oriented ideas and not panicking or doing something rash, you can help your company survive or even thrive during an economic slowdown.
Tax Court decisions upholding 280E and Business deductions:
CANNABIS TAX ALERT: Tax Court Decision Upholds 280E and Business Deductions | MGO (mgocpa.com)
Other Articles by Vertices Co:
https://verticesco.com/accounting-for-medical-cannabis-businesses-explained/
Brad Cocheran, MAMF, Certified Valuation Analyst
Chief Executive Officer
