Recessions and small business: How to survive and even flourish
Tuesday, April 25, 2023
Are we in or headed toward a recession? Who knows. But while it is still a matter of discussion whether we are headed toward a recession – or whether we are in one now – what isn't up for debate is the anxiety that has possessed Main Street America.
According to the U.S. Chamber of Commerce's Q1 Small Business Index, 54% of small business owners continue to cite inflation as their top concern. "This is consistent with [the previous] quarter (53%), and it is the fifth consecutive quarter that inflation has topped the list of challenges they see. In comparison, other issues like revenue, supply chain issues, and rising interest rates remain second-tier concerns..."
So, with tensions rising, small businesses of all kinds are having to at least plan for the possibility of a coming downturn.
Finding your niche
Firstly, while it is true that many businesses have no issues during a recession, some should be wary as an economic disruption could affect them more than others.
According to Dave Charest, director of Small Business Success, Constant Contact, in an interview with Forbes, "Even if a recession does develop, our 2022 Small Business Now report shows that 90% are confident that they will still be in business a year from now. We also often see lots of small businesses get started during recessions."
"However," he continued, "consumers we polled said that, during a recession, they would cut back on spending at ‘convenience,' ‘lifestyle,' and ‘entertainment' businesses first. I strongly encourage those business leaders to begin their recession planning now to be safe."
Startups should plan accordingly, as well. Being aware of how the service you are hoping to provide could be affected by a downturn in consumer activity, is paramount when launching a new business.
A part of recession planning may involve determining whether your business idea can solve a problem created by a recession. If so, steer into it.
"One of the best ways to start a new business successfully during a recession is to look for new opportunities and exploit them," said Kiara Taylor in an article for Business News Daily. "Recessions are opportunities for growth and advancement for wise entrepreneurs. Many recessions fuel demands for specific services or businesses — including bookkeeping, tax preparation, freight and logistics solutions, and accounting — making them great opportunities for professional services and B2B businesses in particular."
During the pandemic we saw the rise of food delivery services such as Grub Hub and Uber Eats, as well as home exercise services like Peloton Interactive. Each of these businesses flourished during a time of economic uncertainty brought about due to the COVID-19 lockdowns.
With people being unable to leave their homes, there were clear consumer needs that these businesses saw they could address.
"Try to identify areas of the economy where the recession has hit most strongly. Then, determine whether your business idea can provide a solution or service to people affected by the recession" suggested Taylor. "If you find a new opportunity before anyone else, your business will grow rapidly even while the rest of the economy is still recovering."
Making it through
When it comes to recessions, one thing that's not often discussed is the aftermath. Some businesses come out the other end stronger, some even flourish.
According to Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen, in their Harvard Business Review article, "Roaring Out of Recession," 9% of companies recover in the three years following a recession. These companies also outperform competitors by at least 10% in sales and profits growth.
In a Harvard Business Review research roundup by Walter Frick, he finds that it all comes down to preparation. "Among the companies that stagnated in the aftermath of the Great Recession, ‘few made contingency plans or thought through alternative scenarios,'" Frick noted, quoting a recent Bain analysis that came upon these findings using data from the Great Recession.
"The underlying message," Frick adds, "is that recessions are a high-pressure exercise in change management, and to navigate one successfully, a company needs to be flexible and ready to adjust."
For small businesses specifically, things are just as perilous. However, if small businesses can learn from previous economic downturns, they too can find light at the end of the tunnel.
According to Investopedia's Barbara Weltman, "One of the effects the financial crisis [of 2008] had on small businesses was that they learned important lessons about watching debt, keeping tight reins on spending, and maintaining access to capital. In addition, new sources of financial assistance unthinkable during that crisis became available, such as crowdfunding, which are still used to this day."
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