How Small Businesses and Startups Can Navigate the Current Hard Economic Times

Definition of an Economic Recession

The Impact of Recession on Businesses

  • There will be less competition in the market, because vulnerable or obsolete firms will go out of business, and fewer entrepreneurs will invest venture capital when the economy is ailing.
  • Buy-side M&A opportunities may emerge not only for big companies. With substantial financial backing, SMEs may seize expansion opportunities: take over customer bases of out-of-business competitors and buy out struggling ones.
  • Customers that you onboarded during the trying times, provided discounts and a lending hand, and helped to grow through the tough times, are more likely to stick with you when things change for the better.
  • SMEs can save on overhead expenses, such as rent, office furniture, electronics, or materials they may get at a discount or buy from businesses that are closing or needing to reduce inventory.
  • A recession is an opportunity to identify vulnerabilities and improve everything. During a weaker economy, it’s easier to justify investments in infrastructure and technical debt. Slower sales cycles even allow for the opportunity to switch from an obsolete technology to something more progressive and capable of scale.

Things to Focus on during the Hard Economic Times

  1. finance
  2. operations and business models
  3. people and processes

Finance

Business Model and Operations

  1. Reflect on the wins and the failures and identify the strategic solutions and approaches that were most effective;
  2. Research your customers and competitors to understand the shifting audience and market demographics with an eye on finding new solutions.
  3. The relationships you build with others in the industry and the discussions you participate in can form beneficial ties and potential business partnerships down the road, keep you updated on new trends, technologies, ways of solving problems, and smarter solutions to adapt to this new reality.
  • You can expand your market by selling online through a website, a mobile application, chatbots, social networks, and other channels;
  • Email marketing is cheaper than electronic or print advertising;
  • If you optimize your website for search engines, it will be coming up at the top of your customers’ searches;
  • You can produce affordable marketing materials, such as podcasts or webinars;
  • An online customer loyalty program updating consumers on sales, discounts, referral bonuses, and coupons will keep them engaged.

People and Processes

Advice for Startups

  • Startups mainly die because they run out of cash. Develop a financial backup plan for your business and personal finances if you fail to hit your initial revenue projections. Put in place a plan to build up cash reserves so that you have at least 12 months of cash. Budget carefully so you can continue making crucial payments. Finally, check your bank balance to make sure you are ready to start a new venture.
  • Manage your expectations and expenses by starting small and planning to expand when your business takes off. Review your business plan and reconsider your needs. For example, identify the most affordable office space or just stay virtual for a while.
  • As for staffing needs, put off hiring full-time staff and instead try to fill positions with independent contractors, temporary and part-time employees, or even outsourcing some tasks.
  • Startups that rely on infusions of venture capital investment should expect that VCs will be restricting their new deal activity. If you were in Merger and Acquisition discussions, don’t expect anything to happen until the pandemic ends. Your existing angel investors may help a bit, but expect it to be quite costly.
  • Trajectory-based financing is another option. Capital firms provide unsecured loans based on predictions of future business trends.
  • Before applying for any loan, ask trusted friends who are business owners, an accountant, loan officer at the bank, or professional advisors to review your business plan to make sure you don’t make inaccurate assumptions or overlook anything critical. It may turn out that taking on excessive new debt is not practical, as debt services can bring you down.
  • Communicate regularly with your shareholders, giving them the good and the bad news.
  • During economic downturns, it takes creativity and ingenuity to get ahead of the game and competitors. Think about ways to broaden your business appeal and customer base. Alternatively, you may divide your original customer base into smaller segments so you can market more strategically, e.g., targeting consumers within a specific age range, career type, income level, or geographic location.
  • Many startups possess valuable core in-house capabilities that are in demand across many industries: software development, data analytics, artificial intelligence, blockchain technology, cybersecurity, etc. Consider changing your startup’s course by marketing activities that may prove more profitable in the new climate.

The Bottom Line

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