Recession-proofing your business

Small business experts explain how to build a resilient business in a changing economy.

What’s the difference between a slowdown and a recession

When consumer spending starts to level off, we say we’re in a slowdown. When that spending goes backwards for six months or more, we call it a recession.

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

Whether you experience a slowdown or a recession, the same sorts of effects are felt. Xero Economist, Louise Southall says the first symptom is a drop in sales.

“Customers spend less so sales go down, which usually immediately takes revenue and profits with it. Because some businesses are raising prices to cover inflation, revenues might initially look like they’re holding up. But an ongoing period of slowing sales may eventually mean revenues stop growing as quickly as expenses, which is when profits start to take a hit.”

Specialist small business consultant Grant Anderson says that dwindling profits tend to hit cash flow. “Money dries up and businesses tighten their belts. They start cutting costs, carrying less inventory, and limiting payroll where they can.”

Why inflation can make things weird

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 it could be a wild ride. “Sales have to drop before prices will, so businesses will feel the twin effects of shrinking sales and inflationary prices for a while.”

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 the rest, however, it’s a matter of going through the cycle. But, as our experts explain, some strategy can help – even when you have to juggle inflation and a tight employment market.

Expert tips for recession-proofing (and inflation-proofing) your business

1. Preparing for a sales downturn (recession proofing)

The most obvious sign of a downturn is that customers stop buying so much. They’re also more cost conscious with the purchases they make, which can work against small businesses.

“Covid reintroduced people to small businesses but it might have been short lived,” observes Cowling. “Customers are drifting back to the big chains that can offer lower prices.”

How to protect your business against declining sales

Be pragmatic about your inputs

“Make sure you’re supplying goods and services at the level of current demand, not what demand used to be,” advises Southall. “Also avoid applying a blanket cut to all products and services. They won’t be affected equally.”

Small luxury items like chocolate actually boomed during the global financial crisis of 2008, precisely because they were an affordable indulgence. Southall recommends watching for similar opportunities in your business.

Use your small business super power to protect sales

While most businesses will have to swallow some decline in sales, there’s no need to quit on marketing. Koziel says small businesses built a lot of goodwill with local communities during the pandemic and now is the time to trade on that loyalty.

“Introduce locals packages or customer appreciation days. Small business customers are incredibly loyal and they will respond. Lean on your relationship with them.”

2. Coping with delayed payments (recession proofing)

Economic crunches slow down invoice payments from customers to suppliers. We know this because Xero’s software records the time that passes 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

Start by getting your invoices out quickly. You’re in for a longer-than-usual wait for payments but that clock doesn’t even start until you’ve sent 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 and if you start to suffer delays from your customers then seek similar relief from the people you owe,” says Koziel. “It’s not uncommon to ask suppliers for more time to pay. Remember that everyone just went through this with Covid.”

Give customers flexibility

Southall says that accepting online payments can also help. “Our data shows that you can reduce wait times by issuing invoices with instant online payment options. There are also a range of apps that you can use to automatically issue payment reminders when invoices are overdue.”

Online invoices allow customers to click straight through and pay instantly, which can reduce wait times for the vendor.

3. Working through cash flow crunches (recession proofing and inflation proofing)

“Most small businesses only hold enough cash to run for 2-3 months,” says Cowling. “So when their sales take a 10% dive, and then their customers start paying late, the cash situation gets really difficult really fast.”

Businesses with poor cash flow struggle to pay their employees, their suppliers, their utilities and their loans. And that cranks up the stress for everyone.

How to protect your business against cash flow problems

Do a cash flow forecast

You can’t fix a problem if you don’t see it coming. A cash flow forecast allows you to plot inbound and outbound payments on a calendar so you can better predict what will be in the bank at a given time. You can use software to do it automatically, but if you’re not that techy, here’s a free cash flow forecast template.

Be clear about who owes what

Keep track of unpaid sales invoices and upcoming bills. If incoming payments begin to slow down, have a chat with your suppliers and lenders about relaxing 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. “Don’t keep doing what you always did,” says Southall. “Respond to the changing market. Step back from goods or services that have cooled off, and stay alert to emerging opportunities. Things will change.”

Maintain flexibility with debt

With interest rates climbing, it’s natural to want to pay down debts faster than normal. Anderson warns that may bring downsides, however. “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. I’d only accelerate loan repayments if the interest rate is really hurting you.”

Review spending

Controlling costs is another way to protect cash flow but, again, it’s a balancing act. “I’ve seen people cut off the muscle with the fat,” says Anderson. “Try to only cut discretionary spending for starters. And ask your staff for ideas. They often see wasteful spending before a business owner does.”

4. Adjusting to inflation (inflation proofing)

As Koziel has explained, input costs like inventory and energy will stay high even after sales have started to slump. And while some businesses might have usually laid off workers to bring down costs, Cowling says that ripcord just doesn’t make sense this time around.

“Employees have been so hard to find and the recession will be over in 12 months, maybe 18; 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

Watch the right metrics

Small businesses are reluctant to pass on every extra cost to their customers and often concede margin as a result. Southall says that will catch them out unless they break some old management habits.

“Owners often check sales or revenue when gauging where the business is at,” says Southall. “In normal times, those numbers are a good proxy for profits. But it breaks down when costs and volumes are changing so much. You need to go directly to the profitability measures.”

Working out profits and margins requires more bookkeeping and maths but it’s vital to keep the business viable. If you don’t already have an accountant or bookkeeper, now might be a good time to get one. Many will produce monthly reports tracking margins and profits for a flat fee. Find an accountant or bookkeeper.

5. Handling the squeeze on margins (inflation proofing)

“A small business might see their costs go up 30% and they feel that pain immediately,” says Cowling. “But they know they can’t pass the whole lot on to customers or sales will tank. So they put prices up 10% and take two-thirds of the hit.”

While businesses often sacrifice profitability in this way, it eventually becomes unsustainable.

How to protect your business against tighter margins

How to handle the dreaded price increase

“A price increase will ultimately become unavoidable,” says Southall. “Businesses need to right-size that increase so they’re not going back to their customers 3 months later with more bad news. You’re better off to do it right the first time so try not to be too timid.”

Koziel adds that customers understand inflation is happening and so price increases are expected. “Just be clear in your communication. It’s the same if you’re removing services because, for example, you can’t find staff. Be open and honest. Loyal customers will still want to support you.”

6. Access to debt and finance (recession proofing)

Business loans are typically secured by assets such as machinery, inventory or accounts receivable. All of these things tend to lose value when a recession sets in, which means things can get complicated with your bank.

“You may no longer have enough security against your existing loans,” explains Koziel. “And your scope for new lending will shrink or disappear altogether.”

How to handle finance in a recession

Staying tight with your bank manager

While this may be only your first or second recession, banks have seen dozens of these things. They’re used to changing gears in a down cycle so don’t be afraid to request flexibility. Just make sure you have a sound financial strategy for navigating the next few months.

“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 being equally open about difficulties making loan repayments. “If your cash flow forecast shows certain payments are at risk, share that information early. Lenders will have much more confidence that you’ll make good if they see you’re forward looking and proactive.”

7. Making decisions at speed

Besides their usual ups and downs, Cowling says economies can be upset by things like trade wars, actual wars and pandemics – all of which have either happened or are happening right now. That leaves a lot of uncertainty on the table.

“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

It’s important to lean on mentors, accountants and bookkeepers at a time like this. Southall says they’re great at framing decisions.

“Accountants and bookkeepers will help you deal with issues in the right order, and they’ll 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.

8. 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 us bust out of 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.”

We told you this recession would get weird.

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 – 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 aren’t happy, or the customers aren’t 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 won’t want to let people go. It’s a chance to address legacy problems.”

It’s cheaper to grow your business

“Some owners – especially those nearing retirement – 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.”


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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