How to recession-proof your business: Four ways to prepare for an economic downturn

As you’ve probably heard by now, we could be in for a recession in 2023 (just what we need after everything we’ve been through 🙄). Of course recessions are a big deal for small businesses—and everyone else, for that matter—but with a little preparation, we know you’ve got what it takes to weather yet another storm.

That’s why we created a playbook that goes over some tips on how to recession-proof your business and prepare for an economic downturn as a freelancer, creator, or really any small business owner. Download the full playbook for free, and/or read on for a roundup of our favorite tips. 

We’ll go over the importance of things like: 

• Cash reserves 
• Finance fundamentals
• Getting paid faster
• Tax deductions 

Keep reading to learn how you can make the most out of our four tips, come up with a strategy for surviving an economic downturn, and take some of the fear out of the word “recession.”

What is a recession and why do they occur?

Time for a bit of Economics 101. Let’s define what a recession actually is, and how one can happen. According to Investopedia, a recession is a “significant, widespread, and prolonged downturn in economic activity.” In other words: a huge bummer. 

If you want to get into the nitty-gritty of it, one way to recognize a recession is when the value of goods and services in a country over one year goes down for two quarters in a row. There are other formulas economists use, but the gist of it is that things are costing more and people are spending less.

As for what causes a recession, it isn’t just caused by financial and economic factors. Supply chain issues, world events (pandemic, anyone?), and even psychological phenomena like consumer confidence can play a role in a recession, too. There’s usually a chain of events with many factors at play, rather than one single cause. 

How can recessions affect small businesses?

A recession can negatively impact a small business in many ways. You might notice your customers aren’t purchasing your goods or services as much as they used to, or that fewer new customers are coming in—which, unfortunately, means slower cash flow.

Inflation (an increase in prices, plus the fall of the value of money) can also cause the cost of borrowing to go up, making it more difficult for you to get loans or pay off debt. 

A recession can also cause staffing issues. You might have to make some tough calls when it comes to layoffs, or on the other side of things, delay hiring despite needing extra help.

Four tips to recession-proof your business

We’ve established that recessions are not cool for business owners, employees, and consumers alike. Now, before you think this article is all doom and gloom, it’s time to go over some solutions you can take to protect yourself from the negative effects of a recession. You might feel like you have no control during times like this, but that’s definitely not the case if you do some research, plan ahead, and think smart! Remember that you can download our full playbook here, which goes into more detail.

1. Cash reserves

Cash reserves, also called cash buffers, are super important for small businesses in times of economic hardship. A cash reserve is money you set aside to act as a safety net in case you need it for an unexpected emergency. 

Our State of Small Business survey, which was conducted in 2021, showed that while more than one in three (36%) respondents were concerned about inflation impacting their business in the year ahead, the majority (57%) of small business owners had less than $5,000 set aside for financial crises. This majority grew even larger when looking at business owners who were the sole employee of their company; nearly seven out of 10 (69%) had less than $5,000 on hand. 

If you don’t currently have any cash reserves for your business, don’t panic! There are still things you can do that can help. Consider cutting back in areas that aren’t crucial right now and repurposing the money towards your cash reserves, or earmarking 5% of each sale towards your emergency fund if you’re able to. Lastly, consider applying for small business grants or emergency relief.

So, how much cash should you reserve? According to experts, on a personal level, you should try to stow away enough money to cover three to six months of expenses. Business-wise, you should have enough cash to cover a year’s worth of expenses. Again, if this seems unattainable right now, just start small with whatever you can afford to save.

To figure out how much cash you need to reserve, we suggest taking a look at your business’s financial statements and making note of the money flowing in and out of your business. Our article on cash reserves will give you a deeper dive into how to do this, along with a few handy cash reserve formulas you can use. 

2. Get familiar with finance fundamentals

A core part of preparing for a potential recession—and running a business in general—is getting familiar with the basics of finance. While this may not be the most exciting of topics, it will serve you well when financially preparing for a recession and beyond. 

Fundamental topics to understand include: understanding cash flow, tracking expenses, and preparing for tax season.

Understanding cash flow

It’s critical to keep track of your cash flow—or revenue (cash in) and expenses (cash out)—because it indicates the financial health of your business by showing how much cash your business has on hand. Tracking your cash flow helps you forecast expenses and prepare for any kind of dry seasons, including a recession.

Tracking expenses

This one sounds basic, but knowing what you’re spending is super important if you want to grow your business and survive any lulls in business. Expenses can include things like: 

• Contractors
• Your website
• Business equipment
• Technology subscriptions

By keeping tabs on your expenses, you’ll get more insight into how much you’re spending and identify expenses you can cut back on. It will also be easier to hold yourself accountable and ask yourself if your home office really needs that new high-end monitor. 

And don’t forget, you’ll need to consider the money you owe in business taxes as an expense, too. 

Preparing for tax season

Speaking of taxes, it’s never too early to start thinking about preparing for tax season. While it’s not everyone’s favorite task, staying on top of bookkeeping can free up more time (and lower your stress!) so you have more bandwidth to batten down the hatches for a recession, which is especially important once tax season rolls around and the bookkeeping can really start to pile up. Some things you can start checking off your to-do list: 

• Catching up on bookkeeping
• Reconciling your bank and credit card statements
• Gathering the appropriate paperwork 

Consider using accounting software to take the pain out of tracking your income and expenses (shameless plug warning: like Wave’s accounting feature!). This will enable you to stay on top of your business finances without the hassle of trying to manage it manually, plus it’ll make tax time way easier since you’ll have your information in one place. 

3. Get paid faster

Okay, we get that this step sounds easier said than done, but it might be easier than you think. 

One of the biggest challenges when running a small business is receiving timely payment for your services. This challenge is amplified during recessions, which is why coming up with a game plan to get paid faster is key. Plus, getting paid faster will help you build up those cash reserves we mentioned above. 😉

Unfortunately, getting paid on time is a struggle that’s real for most small business owners. Wave’s Report on Getting Paid showed that approximately 22% of digital invoices were overdue in 2021. When Wave asked 1,000 microbusiness owners in the US to share their experiences with late payments, we discovered that 70% wait one to six months to get paid, and 25% wait up to a year or don't get paid at all. Ouch. 

One trick to encourage your customers to pay you faster is to make it as easy as possible for them to pay. Did you know that when you use Wave’s invoicing feature paired with our online payments feature, your invoices are more likely to get paid on time? We found that 84% of invoices were paid on time when online payments were enabled, compared to only 69% without online payments. Check out the video below to learn how Wave's invoicing and online payments features can help you get paid faster!

4. Tax deductions

Having an understanding of which business expenses can be used as tax deductions (also known as “write-offs”) can have a huge impact on how much money your business will save during tax season (paying less on taxes during a recession is always a win). 

A tax deduction is a business expense you can subtract from your taxable income, which can lower the amount of tax you have to pay. It’s as if you “earned” less money, and therefore have to pay less tax.

When you prepare and file your taxes, you can claim deductions your business qualifies for—including things like rent and utilities, home office expenses, advertising, legal fees, and office supplies—and reduce the amount of tax you have to pay. To know what tax deductions you qualify for, we recommend that you consult a tax professional. 

The best time to recession-proof your business is now

Recessions understandably fill a lot of small business owners with fear, but by doing as much as you can to prepare yourself, you’re already one step ahead. Plus, think of this time as an opportunity to build a foundation of best practices that will set your business up for growth, regardless of the state of the economy, like:

• Building up your cash reserves 
• Nailing down finance fundamentals
• Coming up with solutions to get paid faster
• Finding tax deductions 

We know this isn’t easy, and can be a lot to take on by yourself, but the team here at Wave is cheering you on! For our full list of tips and more in-depth advice on how to recession-proof your business, download the rest of the playbook. Did we mention it’s free? 😉