Three out of four economists predict that the US economy will enter a recession by 2021. Some economists are predicting that the next recession could be deeper and more severe than the previous one in light of the fact that business and household debts are at higher levels than they were prior to the Great Recession of 2007-09, a global trade war is ramping up and there’s been a significant increase in the federal debt.
Small Businesses Take A Bigger Hit During Recessions
According to a study conducted by the New York Federal Reserve Bank, recessions hit smaller firms much harder than larger ones. Without access to the kind of reserves large corporations often have, small businesses have a difficult time absorbing declines in customer spending. The simultaneous pullback in bank lending can sap small firms’ ability to fund day-to-day operations. This inevitably leads to an increase in bankruptcies and business closures.
While a recession and the resulting impacts on customer spending and bank credit are outside of entrepreneurs’ control, one important and often overlooked factor remains firmly within it: Preparation.
According to a famous economic adage: “economic expansions don’t die of old age”. They are inevitable. Just as you think about and make plans for business growth, it’s also imperative to think about and make plans for a downturn in business.
Surviving and Thriving During a Downturn
Nick Gialamas knows a thing or two about making plans. His company, Forest Financial Group—an employee benefits consulting firm, survived—and thrived—during two recessions before being sold to HUB International in 2015.
“I started my company in 1998 at the height of the tech boom”, he says. “We came into the market focused on technology start-ups. In 2001, the bottom fell out of the tech market. Recession hit and those businesses started closing or downsizing. We were selling employee benefits, primarily health insurance, to employers. We were definitely not a recession-proof business.”
Gialamas had to learn how to sustain a major hit fairly early in the lifecycle of his company.
“The first thing I learned was don’t panic. Markets go down and businesses downsize. Recessions impact all of us. I realized as I was struggling, so were many of my clients. I needed to be sure to stay positive. I started asking myself how can I help them get through the issues in their businesses? I had to get creative and come up with solutions to help them save on their healthcare spend. It was also a good opportunity to find new customers.”
Gialamas says the lessons he learned during his first recession helped him to prepare his business for the next one, the Great Recession, which was far worse.
“One of the most important things I learned is you’ve got to stress test your business”, he says. “You have to think about how you survive the worse-case scenario. We did this annually.”
“When we looked at it, a lot of our business was coming from a few big accounts. So, what would happen if a recession caused us to lose one of those accounts? We figured out that we needed to be prepared for that possibility, and always be out selling so that we could sustain the loss of any business during a downturn.”
Gialamas offers this advice to entrepreneurs:
- Selling cures everything – “Grow the top line and it will solve for a lot of your problems.”
- Stress-test your business – “Do an annual SWOT analysis. Know what your strengths are and figure out how to strengthen your weaknesses. Think about how you’ll manage profitability, how you’ll retain employees. Look for additional streams of revenue.”
- Focus on what you’re good at – “Focus is critical. You don’t want to get dispersed in too many different directions. Focus on what you are really good at and then build from there. We focused on employee benefits/healthcare insurance. We didn’t branch out into offering all other kinds of insurance products. We stuck to what we were good at.”
- Get creative with how you service your clients – “We realized that smaller was better because what we lacked in size, we were able to make up with the ability to get things done. We didn’t have bureaucracy. We spent our time focusing on fostering incredible relationships with our customers, partners and vendors.
“Recessions don’t last forever,” Gialamas says. “Figuring out how you can survive and thrive ahead of time is the key.”