save money and minimize bills as a enterprise proprietor in a recession
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Many small business owners have already cut back in the recessionary winds, but more cuts may be needed to weather the brewing economic storm.
U.S. economic growth contracted 0.9% in the second quarter, the Bureau of Economic Analysis reported Thursday, the second consecutive quarter of negative GDP. That will fuel fears that the economy has entered a recession, although technically it’s not an accepted definition of this shift in the business cycle. Fed Chair Jerome Powell said on Wednesday he doesn’t think the economy is in a recession.
Some small companies have already scaled back on signs of a slowdown. A report released Thursday by financial automation platform Ramp found that small business spending on electronics fell 59% between May and June. Many small businesses spent 28% less on shipping, 14% less on advertising, and 11% less on SaaS and software purchases over the same period, the report found.
“I’m advising my clients and social media followers to back out of any unnecessary spending to see what the economy brings in the second half,” said Brian Moran, chief executive of Small Business Edge, which provides guidance to small businesses.
Finding ways to reduce fat without cutting into the meat of the company is a challenge for many owners. Here are three tips for surviving a recessionary environment.
Conduct an expense self-assessment
Owners don’t always know exactly what they’re spending money on, so conducting a self-assessment is the first task. Use the last three bank and credit card statements to identify areas where you can make small but meaningful cuts, said Carissa Reiniger, founder and chief executive officer of Silver Lining, which advises and lends to small businesses.
For example, your company may have subscriptions to magazines, apps, software, or networking groups that are underutilized or underutilized. Those costs can really add up, especially when you’re paying per head. Also look at other recurring expenses, including phone service, utilities and bank account fees, to see where you can reduce or eliminate specific costs, she said.
“I think the average small business could cut their expenses by 20% without feeling a pinch,” Reiniger said. Don’t be afraid to negotiate. Especially in economically turbulent times, small companies have more bargaining power, she said.
Examine supply chain costs and inventory levels
David Quinn, chief financial officer at banking fintech Bluevine, said small businesses should also negotiate with suppliers. During these discussions, consider whether you can offer your supplier something different that others do not. Also, consider whether you can agree on a deal that will help both sides, he said. Some suppliers may not be willing to broker a deal, but in this case there may be other options to save costs such as B. Discounts for bulk purchases, he said.
Cutting back on upfront spending can also be a smart move. Peter Shieh, Senior Wealth Advisor at Citi Global Wealth, has a client in the commercial lighting business who has historically held inventory like lightbulbs and electrical cords for six to nine months. Now the customer orders a maximum of three months in advance. The customer has also negotiated with suppliers to set prices for specific products. “With inflation, prices could be 20% to 30% higher in three months, so that’s another thing they’re thinking about and planning for,” Shieh said.
Save money but be strategic, especially with employees
A tactic to save cash could be to pay bills closer to the due date than 15 or 20 days in advance, or ask for a longer payment window, say 60 to 90 days instead of 30 days.
Also, look at real estate costs, said Matt Armanino, chief executive and managing partner of Armanino LLP, an independent accounting and business advisory firm. If your lease is about to expire, consider whether you really need the space you have given the hybrid or remote work trend. Or is it possible to sublet a part of the space in the case of a long-term lease?
For most small businesses, one of the biggest expenses is employee-related costs, so it’s an easy effort to cut costs. Don’t jump with the gun. The cost of hiring and retaining talent is particularly high right now, so it can be “small and stupid” to let people go unless you really have to,” Armanino said.
If you’ve tried other options and still need to cut costs, consider furloughing workers instead of firing them outright, said Joshua Oberndorf, CPA at EisnerAmper. Let them know how valuable they are to your business and your intent to bring them back as soon as possible, he said.
You might also consider taking out a small business line of credit to use as a short-term tether, Shieh said. For this option, a small business could expect an average APR of between 7% and 25%, according to NerdWallet’s Fundera. Although rates are higher now than, say, six months ago, it’s good to have the lifeline to access when needed, he said. There are other small business financing options, too, including friends and family, online lenders or financiers, and SBA loans.
Invest in productivity, cost savings and future revenue
Take a look at which parts of the business can be automated or digitized. For example, you might be able to use a chatbot to reduce customer service costs, or switch to online training instead of onsite training. Armanino’s company did the latter, for example, and the move paid for itself within a few quarters.
Sometimes you have to spend a little money up front to see longer-term cost savings, he said. That’s true even in a downturn, especially when the money you’re spending elsewhere can be reallocated to those uses, he said.
Many small businesses are tempted to shut down their marketing activities during a downturn. Don’t fall into this trap. Consider a study by McGraw-Hill Research that analyzed 600 companies from 1980-1985. Findings showed that companies that stayed on track with marketing spend through two years of recession significantly increased sales. And by 1985, those who advertised aggressively during the recession had significantly higher sales than those who let the ads go by the wayside.
“You don’t want to cut off communication with customers, that’s your future revenue,” Oberndorf said.