How to build a recession proof business: Steps to stay resilient
Economic downturns test every business, but recession proof strategies help you survive and thrive.
Written by Lena Hanna—Trusted CPA Guidance on Accounting and Tax. Read Lena's full bio
Published Wednesday 5 November 2025
Table of contents
Key takeaways
• Build strong cash reserves equivalent to 6-12 months of operating expenses and implement cash flow forecasting to predict financial challenges weeks or months in advance, giving you time to take corrective action before problems become critical.
• Diversify your revenue streams across multiple income sources and markets to reduce dependence on any single customer base, as businesses with multiple revenue channels can maintain stability when one area experiences decline.
• Monitor profit margins and profitability metrics directly rather than focusing solely on revenue figures, since rising costs during inflation can erode profits even when sales appear stable.
• Communicate proactively with banks, suppliers, and customers about potential payment delays or financial pressures before problems occur, as early transparency builds confidence and creates opportunities for flexible payment arrangements.
What’s the difference between a slowdown and a recession
A slowdown occurs when consumer spending levels off, while a recession happens when spending declines for six months or more. Understanding this difference helps you prepare the right response for your business situation.
Slowdowns or recessions are a natural part of an economic cycle, with Marc Cowling, professor of economics and productivity at Oxford Brookes University, noting there are generally more ups than downs. "Recessions, for example, are felt for about 12 – 18 months, then they're followed by a 2-year recovery, a 4-year boom, a year of overheating, and then a new recession."
What happens during a slowdown
Economic downturns create predictable business impacts that you can prepare for:
- Sales decline first: Customers reduce spending, immediately affecting your revenue; during the 2009 recession, 45% of small and medium-sized enterprises reported a fall in turnover, more than double the figure from the previous year.
- Profit margins shrink: While you might raise prices to cover inflation, sales volumes drop faster than price increases can compensate.
- Cash flow tightens: Revenue growth slows while expenses continue, creating financial pressure.
Specialist small business consultant Grant Anderson says that dwindling profits tend to hit cash flow. "Money dries up and businesses tighten their belts. They cut costs, carry less inventory, and limit payroll where they can."
How inflation affects your business
Mark Koziel, President of Allinial Global (an accounting association), says the good news is that slowdowns cool off inflation. "Declining sales allow under-pressure supply chains to catch up with demand and alleviate prices."
But he warns that businesses may face a challenging period. "Sales have to drop before prices will, so businesses will feel the twin effects of shrinking sales and inflationary prices for a while."
What makes a business recession-proof
Recession-proof businesses share specific characteristics that help them maintain stability during economic downturns. While no business is completely immune to recessions, certain traits significantly improve your chances of survival and growth:
Key recession-resistant characteristics
- Essential services: You provide necessities people cannot postpone
- Diverse revenue streams: You have multiple income sources to reduce dependence on any single market
- Strong cash reserves: You have enough funding to cover 6 – 12 months of reduced income
- Flexible cost structure: You can adjust expenses quickly without damaging core operations
- Loyal customer base: You have strong relationships that withstand competitive pricing pressure
Geographic diversification also helps – exporters often weather local recessions better by spreading risk across multiple economies.
How do businesses prepare?
There's no definitive way to recession-proof a business – although Cowling notes exporters are often protected because they spread their risk across multiple economies.
For most businesses, you need to work through the cycle. However, using the right strategies can help you manage inflation and a tight employment market.
Preparing for a sales downturn (recession proofing)
Sales downturns during recessions follow predictable patterns that you can address strategically.
Customer behaviour changes:
- Reduced spending: People buy less of everything, prioritising essentials
- Price sensitivity increases: Customers compare prices more carefully and seek better deals
- Brand loyalty weakens: Cost-conscious buyers may switch to cheaper alternatives, often favouring larger competitors
How to protect your business against declining sales
Adjust production to match current reality:
- Match supply to actual demand: Base inventory and staffing on current sales, not pre-recession levels
- Avoid blanket cuts: Different products and services will be affected differently during downturns
- Identify opportunity products: Small luxury items often increase during recessions as affordable treats (chocolate sales boomed during the 2008 financial crisis)
Use your strengths as a small business to protect sales
While most businesses will see some decline in sales, you should continue marketing. Koziel says small businesses built goodwill with local communities during the pandemic, and now is the time to use that loyalty.
"Offer local packages or customer appreciation days. Small business customers are loyal and will respond. Use your relationship with them."
Online invoices allow customers to click straight through and pay instantly, which can reduce wait times for the vendor.
Coping with delayed payments (recession proofing)
Economic crunches slow down invoice payments from customers to suppliers. Xero’s software records the time between when an invoice is issued and when it’s paid.
Taking the US as an example, that data shows payment wait times leapt 11% after the 2018 US-China trade tensions, and 15% after the first Covid outbreak.
Southall notes the problem is self-perpetuating. "A business that's paid late will then struggle to pay their bills on time, and so the problem spreads quickly."
How to protect your business against delayed payments
Nail down your invoicing process
Send your invoices quickly. You may wait longer for payments, but the process does not start until you send the bill. Keep track of how long it takes to get paid and take action if things start to slip.
"Seek payment on overdue invoices. If your customers delay payments, ask your suppliers for more time to pay," says Koziel. "It is common to request extra time during tough periods."
Give customers flexibility
Online invoices allow customers to click straight through and pay instantly, which can reduce wait times for the vendor.
Southall says that accepting online payments can also help. "You can reduce wait times by issuing invoices with instant online payment options. There are also a range of apps you can use to automatically send payment reminders when invoices are overdue."
Working through cash flow crunches (recession proofing and inflation proofing)
Cash flow problems accelerate quickly during economic downturns, a major vulnerability when research shows the average UK small business already faces more than four months of negative cash-flow stress per year.
The cash flow crisis progression:
- Sales drop 10% or more: Immediate revenue reduction
- Payment delays increase: Customers take longer to pay invoices
- Operating costs remain fixed: Employees, suppliers, utilities, and loans still need payment
- Stress compounds: Financial pressure affects decision-making and team morale
How to protect your business against cash flow problems
Cash flow forecasting predicts future financial challenges before they become critical, giving you time to take corrective action.
Implementation options:
- Automated software: Connects to your accounting system for real-time forecasting
- Manual template: Use our free cash flow forecast template for basic planning
- Key benefit: See potential cash shortfalls weeks or months in advance
Be clear about who owes what
Keep track of unpaid sales invoices and upcoming bills. If payments slow down, talk to your suppliers and lenders about extending your payment deadlines. "They will feel better about extending your credit if you can give them specific reasons why," says Anderson. "Use a forecast to explain why your cash flow is low and when it will improve."
Match production to demand
Smart sales forecasting can help you spot shifting demand and avoid overinvesting in unnecessary inventory, transport, or human resources. Southall suggests you review your approach regularly, respond to the changing market, and focus on products or services that are still in demand.
Maintain flexibility with debt
With interest rates climbing, you may want to pay down debts faster. Anderson says this can have downsides. "If you put spare cash against your debts and then suddenly need that money back, you'll have to apply for a new loan," he explains. "The lender may not give it. Only accelerate loan repayments if the interest rate is really hurting you."
Review spending
Controlling costs is another way to protect cash flow, but you need to be careful. Anderson says, "Try to only cut discretionary spending at first. Ask your staff for ideas. They often spot wasteful spending before you do."
Adjusting to inflation (inflation proofing)
As Koziel has explained, input costs like inventory and energy will stay high even after sales start to fall. Cowling says laying off workers may not be the best option this time.
"Employees have been so hard to find and the recession will be over in 12 – 18 months, so why would a business lay people off unless they really had no other option?"
So if costs aren't going anywhere, what gives?
How to protect your business against rising costs
Protect your margins by monitoring the right financial metrics during inflation.
The measurement problem:
- Old habit: Checking sales or revenue as business health indicators
- Why it fails now: Revenue can appear stable while profits disappear due to rising costs
- Solution: Track profitability measures directly, not revenue proxies
Essential metrics to monitor:
- Gross profit margin
- Net profit margin
- Cost per unit sold
- Customer acquisition cost
Working out profits and margins requires more bookkeeping and maths, but it is vital to keep your business viable. If you do not have an accountant or bookkeeper, consider hiring one. Many can produce monthly reports tracking margins and profits for a flat fee.
Handling the squeeze on margins (inflation proofing)
"A small business might see their costs go up by 30% and feel that pain immediately," says Cowling. "But they know they cannot pass all of that on to customers or sales will fall. So they increase prices by 10% and absorb the rest."
While businesses often sacrifice profitability in this way, it eventually becomes unsustainable.
How to protect your business against tighter margins
Price increases become unavoidable during inflationary periods, but strategic implementation protects customer relationships.
Implementation strategy:
- Make one substantial price increase rather than multiple small ones
- Communicate clearly and explain your reasoning for price rises
- Include service changes due to staffing challenges in your communication
- Loyal customers will support necessary changes if you're transparent
Access to debt and finance (recession proofing)
Business loans are typically secured by assets such as machinery, inventory or accounts receivable. These assets often lose value during a recession, which can affect your ability to borrow.
"You may no longer have enough security against your existing loans," explains Koziel. "And your scope for new lending will shrink or disappear altogether. This reflects historical trends; during the 2009 recession, the proportion of small and medium-sized enterprises reporting that obtaining finance was a major obstacle rose from 9% to 14%."
How to handle finance in a recession
Banks expect recession-related requests and have standard procedures for helping businesses through downturns.
Approach your bank with:
- Proactive communication: Contact them before missing payments
- Clear financial strategy: Show your plan for the next 3-6 months
- Specific requests: Ask for payment deferrals, loan modifications, or extended terms
- Documentation: Provide cash flow forecasts and revised business projections
"If you plan to run inventory low – and your loans are usually secured by inventory – then you need to work out how that looks with your lender," Koziel explains.
Anderson recommends you are open about any difficulties making loan repayments. "If your cash flow forecast shows certain payments are at risk, share that information early. Lenders will have more confidence in you if you are forward looking and proactive."
Making decisions at speed
Besides their usual ups and downs, Cowling says economies can be affected by trade wars, wars, and pandemics – all of which have happened recently. This creates uncertainty for businesses.
"Businesses already juggling the impacts of high inflation, low unemployment, and slowing sales may feel overwhelmed," says Southall. "They don't know what to focus on, or what's coming next."
How to make decisions at speed
Get play-by-play advice from an accountant or bookkeeper
Its important to lean on mentors, accountants and bookkeepers at a time like this. Southall says theyre great at framing decisions.
"Accountants and bookkeepers will help you deal with issues in the right order, and theyll make sure you have the necessary numbers to make smart decisions."
They start by creating accounting reports that show where a business's financial pressure points are. Then they work with owners and managers to fix those problems. Regular consultations are often handled online, for a flat fee, which prevents cost blow-outs and meeting fatigue.
"A regular cycle of reporting and troubleshooting can help you identify and resolve issues faster and will keep you clear-headed about the strategies you've chosen," says Southall.
Finding employees during a downturn
Labour shortages don't commonly coincide with slowdowns. In fact, businesses traditionally lay workers off at times like these. However, this time they may not.
"Businesses have worked so hard to recruit staff that they're going to be very reluctant to shed them at the first sign of a downturn," says Southall. "They may cut back on hours, but wholesale redundancies seem unlikely at this stage."
High employment is good fuel for spending and should help the economy recover from the recession sooner, but Koziel notes it's a massive handbrake for businesses.
"Customers are walking into half-full restaurants and being told they can't be seated because there aren't enough staff. It limits a business's capacity to generate revenue."
Going on a recruitment drive
It's poaching season
While unemployment figures are expected to stay low, worker income will likely drop in real terms.
"Wage raises won't match inflation and some employees will find their hours cut," says Cowling. "Their spending power will decline which means now is a good time to poach them."
Koziel predicts a redistribution of workers from larger businesses to smaller ones.
"Those medium and larger sized businesses may still go with the knee jerk reaction of laying people off. It's a fast way to cut costs. That will give smaller players a chance to find much-needed help."
So stay awake to new recruitment opportunities. You might even experience the serendipity of increasing sales during a recession.
- "A business that has been understaffed hasn't been able to meet demand for months anyway," explains Koziel. "They might not even notice a drop in consumer spending. But if they can suddenly hire extra people and increase their capacity, they may actually find that sales go up."
This recession may bring unexpected changes.
Recession-proofing your business checklist
Metrics to watch:
- Debtor days (average time to get paid)
- Cash flow
- Profit (not revenue!)
- Profit margins
Think about:
- Right-sizing your prices
- How to use downtime effectively
- How to trim your budget without gutting it
- How to adjust inventory
- How to allocate human resources more efficiently
Speak to:
- Customers about price or service changes
- Banks about loan security and payments
- Employees about waste they see in the business
- Employees about hours
For next time
Build a cash reserve 2013 if you're just googling 'how to recession-proof a business' today then you're too late for this one. But it might help to have a bigger emergency fund for the next time this happens.
How a slowdown can create opportunity
While there are tricky times ahead for many business owners, slowdowns also present opportunities. Recession-proofing your business shouldn't be all about going into your shell. Here are a few upsides to focus on.
You get to have a think
"In a boom, you don't have time to do everything the way you might like," says Cowling. "Everything is very immediate and often rushed. Slowdowns give you time to sort stuff out and reorganise the business to work better."
You can properly train your people
"Small businesses get busy so quickly that they often just hire people without ever really training them properly," notes Koziel. "Then they wonder why the staff arent happy, or the customers arent happy. A slowdown is a chance to set the business up so future employees can succeed."
You can finally fix that thing
"Businesses always have a backlog of stuff to do, like fixing machinery or updating databases," explains Cowling. "There's heaps of work to do during the next few months. That's another reason why owners wont want to let people go. It's a chance to address legacy problems."
It's cheaper to grow your business
"Some owners 2013 especially those nearing retirement 2013 will opt to sell or close their business," says Anderson. "You may be able to acquire customers, equipment, or premises at a lower cost than during a boom."
Your business will probably get more efficient
"Those businesses that survive downturns are also usually the most productive," observes Southall. "They improve processes or use new technologies to become more efficient so while slowdowns can be painful, they often help businesses come back stronger."
Building a resilient business with the right tools
Navigating an economic downturn means being proactive. A clear, real-time view of your finances helps you make smart decisions quickly. You cannot manage your cash flow, protect your margins, or spot opportunities without accurate financial information.
This is where the right tools make all the difference. With cloud accounting software like Xero, you can automate bookkeeping, track profitability, and forecast your cash flow from anywhere. It gives you the confidence to act decisively and focus on what you do best 2013 running your business. See how Xero can help you build a more resilient business. Try Xero for free.
FAQs on recession-proofing your business
Here are answers to common questions about how you can recession-proof your business.
Which industries are most recession-proof?
Industries that provide essential goods and services tend to be the most resilient. This includes healthcare, grocery stores, vehicle repair, and professional services like accounting and legal advice. People need these services regardless of the economic climate.
How can multiple revenue streams make my business more resilient?
Having multiple revenue streams is like not putting all your eggs in one basket. If one area of your business slows down, income from other areas can help keep your cash flow stable. It spreads your risk and makes your business less vulnerable to shifts in a single market.
What's the difference between cutting costs and strategic investment during a recession?
Cutting costs is about survival 2013 trimming non-essential spending to preserve cash. In fact, research shows that one in three mid-sized businesses has restructured its operations to manage costs. Strategic investment, on the other hand, is about positioning for future growth. A good strategy balances both.
How much cash reserve should a small business maintain?
A common rule of thumb is to have enough cash to cover three to six months of operating expenses. This provides a safety net to pay bills and staff if your revenue drops unexpectedly. Your accountant can help you determine the right amount for your specific business.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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