Small and medium-sized businesses (SMBs) are known as the backbone of the U.S. economy and play a major role in most economies, with tremendous contributions to job creation. They represent about 90% of businesses, and more than 50% of employment worldwide.
Although some continue to thrive, many SMBs were hit severely by the economic impact of the COVID-19 pandemic. And now, just as a post-COVID world takes shape, SMBs face the daunting task of navigating through the possibility of a recession — many for the first time. With record-high inflation and fears of a looming economic downturn, companies, especially SMBs, need to recession-proof their businesses by taking critical actions now.
These four recommendations will have great benefit to SMBs.
1. Assess Capital Needs Now
It is a must for SMBs to prepare now for a continued economic downturn. Businesses should have saved or should look into obtaining the capital they need to carry them for the next 12-24 months, just in case future financing dries up or becomes prohibitively expensive.
Equity and credit markets have already started to contract, and terms have become more onerous. Businesses that don’t have enough capital to cover their downside risk are ill-prepared. The cost of capital is increasing as the Federal Reserve continues to make its interest rate adjustments.
2. Mind the Workforce
The strong demand and short supply of available, qualified workers is one of the most significant factors driving inflation. Due to low unemployment and a highly competitive labor market, wages are higher than ever. It is important to re-evaluate your current workforce to make sure you are keeping up with current market compensation and benefits levels.
Employee churn is highly disruptive, and replacing a worker who leaves can lead to gaps in meeting customer service levels and will cost you market wages to attract new talent.
3. Watch Customers' Purchasing Behaviors
Inflation and the fear of a more severe economic downturn can force people and businesses to be more selective about spending — this is where you see the impact on the greater economy, even if it’s not technically during an economic recession. When managing a business, it is easy to be overwhelmed by economic data and various expert predictions as to what will happen with the economy.
The best way to understand how your business will be impacted in the future is to actively engage with your customers to hear whether they plan on dialing back their purchasing or have the wherewithal and confidence to keep spending. This will allow you to plan on whether to scale your business up or down based on expected future demand.
4. Access New Markets
Today’s volatile environment requires different approaches to successfully manage economic hurdles. It is particularly useful to access new markets during recessionary pressures when a company’s strategy cannot be based on selling in only one geography or sales channel. Most SMBs in the U.S. earn the vast majority of their revenues from domestic customers. Only a very small minority, 3% according to the Small Business Administration, sell overseas.
Digitalization of commerce has made global expansion much easier, but many small businesses don’t know how to enter foreign markets. However, many of the e-commerce marketplaces in the U.S., for example, offer global diversification through their foreign marketplace offerings and there are many non-U.S. marketplaces looking for U.S. sellers to join their platforms. Once commerce is digitalized, physical borders become less of a barrier.
History proves that recessions can break or make businesses. While the future may not look clear for SMBs, the best strategy for U.S. companies to prepare for a recession is to perform sensitivity analysis on their business and evaluate different scenarios from worst case to best. Then make sure that you can withstand the worst-case scenario.
Capital allocation is critical, and businesses should make sure they have enough capital to withstand a sustained downturn. However, that does not mean eliminating investment or not planning for growth. A well-capitalized company might be the last one standing in its space if its competitors did not prepare properly, and will be able to pounce on that opportunity, should it arise.
Michael Levine is chief financial officer of Payoneer.