How to Survive a Recession

Note: This article was originally published in 2011, during the "Great Recession." While that recession has long since ended, this content is still applicable to any subsequent market recessions.

If you paid attention to the grim financial news during the Great Recession, you may recall hearing a good deal of chatter about whether or not we were headed for a double-dip recession. And while most of you are probably familiar with the dreaded double-dip when it comes to chips and dip, you may be wondering what exactly constitutes a double-dip with regard to recessions, or, for that matter, who determines whether we are experiencing a recession and how exactly one is defined.

So, let’s try and answer these questions before moving on to offer some advice on how to cope with a recession, double-dip or otherwise.

What Is a Recession?

In the U.S., the National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee that is tasked with maintaining a chronology of the country’s business cycle and is the body that officially calculates when recessions begin and end. Unfortunately, its definition of a recession as “a period between a peak and a trough” in economic activity is somewhat less than instructive.

Perhaps because of the NBER’s nebulous definition, the financial press and most professionals in the field have come to rely on the more tangible idea that two consecutive quarters of decline in real Gross Domestic Product (GDP) constitutes a recession. (For those of you who decided to give Econ 101 a pass, GDP is the total value of all goods and services produced in a country in a given year.)  We’ll rely on this commonly accepted and easily quantifiable definition for our purposes here.

And while the NBER does not define a special category of double-dip recession, practically speaking, this refers to a recession that begins shortly after the previous one has ended. In the current case, people are concerned that there may be another recession looming, despite the fact that the one that resulted from the global financial crisis ended in June of 2009, according to the NBER.

So, we now know that during a recession, the total amount of goods and services being produced is declining and that we may be headed for another such period even though we only recently emerged from the particularly nasty recession of 2007 through 2009.

What does this mean for small business owners? 

Because the amount of goods that gets produced goes into decline when we experience a recession, recessions are often characterized by periods of high and rising unemployment, as employers are forced to lay off workers when demand for their products sags. As more folks enter the ranks of the unemployed, the demand for goods and services can fall further, as it is tough for the out-of-work to justify buying anything other than the essentials. 

In this way, recessions and unemployment can have a negative self-reinforcing effect that makes things tough not just for the unemployed but for those trying to keep their businesses afloat during these turbulent times. 

Coping with Recessions as a Business Owner

While we are not here to make economic predictions, we would like to offer small business owners five strategies to help cope with the next recession whenever it does arrive.

1. Focus on Costs
   Your bottom line is, of course, driven by your revenues as well as your costs. While it can be tough to increase your revenues even in the best of times, you do have control over some of your costs, specifically your variable costs. Just as you may be struggling with your business, your suppliers are not immune to the effects of recession either. Because they don’t want to lose you as a customer, now can be a good time to negotiate with suppliers for lower prices.
   
   If your business is operating well below capacity you may have more manpower than you need, and it may be time to think about cutting back some of your employees’ hours. While cutting hours or laying off employees can be very difficult, it is critical to honestly assess your business’s needs in order to survive difficult times.
    
2. Preserve Your Cash
   The old adage that cash is king is never truer than during a recession. Because banks become reluctant to lend as the economy sours, previously available financing can dry up very quickly, so managing your cash efficiently can make the difference between survival and failure.  Make sure to stay on top of your accounts payable, and if you are able to take advantage of credit (without getting over-leveraged) in order to preserve much-needed cash, then by all means do so.
    
3. Embrace the Barter System
   Contrary to what you might think, the barter system did not disappear with the advent of the market economy; it is alive and well today. Say you really need to update your website in order to make a marketing push (and marketing is something you should try not to skimp on during a recession), but you don’t have it in your budget to pay a web designer. Well, chances are pretty good that there are quite a few underemployed designers around, and if you are persistent you may be able to find a good one who is willing to exchange some of his/her time for whatever goods or services your business has to offer.
    
4. Ramp Up Your Customer Service
   While ramping up anything in a recession may seem counterintuitive, customer service is one area in which you can actually have an advantage over your bigger competitors, particularly during turbulent economic times. When large companies struggle with massive layoffs and restructurings, their customer service—which often isn’t a strong point to begin with—can suffer greatly.
   
   As the owner of a small business, you have much greater control over your company’s interactions with customers than the CEO of a giant multinational does. And during a recession, you may have more idle time to assess and improve those relationships. Taking the time to do so will not only help you ride out the storm but should build loyal customers who remain with you during the good times too.
    
5. Focus on What You Do Best
   When times are tough and business is slow it is important to ask yourself, “What is it that my business does best?”  Like a lot of entrepreneurs, you may have branched out from your initial focus and become involved with a number of different products or business lines. Now is the time to take a hard look at the numbers for each area of your business to see what is working and what isn’t. By refocusing your resources on what you do best (i.e. what makes you the most money), you’ll wind up with a more efficient and profitable company.

While there are no surefire tricks to surviving a recession, following the preceding advice should increase your odds of making it through until things get better; and in the long run, they always do.