Small Business & Cash Flow: Succeeding In Economic Downturns

Lendio, the nation’s leading financing marketplace for small businesses, has joined with Dun & Bradstreet to provide education, tools, and simplified access to working capital solutions essential to successful navigation of potentially volatile economic conditions. This guide is part of the ongoing, combined commitment of both organizations.

Cash Is King Regardless Of Economic Conditions

Costs are up. Profit margins are down. That budget you created at the end of 2021 is either long forgotten or weeping in a corner. While gas prices have leveled off and the supply chain hasn’t been kinked by a big boat stuck in a small canal for over a year now, you still can’t help but think, “What's next?”

Truth be told, there’s still some debate over whether a recession is imminent. If you ask small business owners, which CNBC and Survey Monkey did earlier this year, 81% will tell you that we’ll enter a recession before the end of 2022. But the National Bureau of Economic Research (NBER), which tracks and officially declares whether or not the economy is truly in a recession, says no, all of the indicators still aren’t there.

The U.S. has experienced 30+ NBER-declared recessions since 1854, the first year economic data was kept for the U.S. The average recession lasts about 10 months, although there are exceptions. While 10 months may not seem very long, the ability to weather a pretty extreme downward-spiraling financial storm for most businesses comes down to cash flow and how well prepared a business is to survive across-the-board slowdowns[1] .


What Is Cash Flow and Why Does It Matter?

During a recession, both trade activity and industrial activity slow down; at the same time, unemployment increases and prices drop. Overall, businesses make less money, which impacts cash flow.

But what is cash flow? In its simplest form, cash flow is just the movement of money in and out of a business. Cash flow is made up of inflow (when a business receives money) and outflow (when a business spends). For example, when a customer pays an invoice, that’s cash inflow for the business. When that same business pays its employees, that’s cash outflow. Ideally, a business’s inflow will exceed its outflow on a consistent basis.

Although the concept of cash flow is simple, a 2019 Lendio survey indicated that cash flow management was the number one challenge small businesses face. Why? Because cash flow varies throughout any specified period. Viewed over a 12-month period, there will be months when a business takes in more money and other months when it pays out more in expenses. Usually, however, businesses budget for these fluctuations. But budgeting fails when something unexpected happens.

Businesses plan annual budgets based on historical data, which allows for the prediction of future expenses and income. Most budgets also include increases to accommodate expected inflation, which usually hovers around 2%, in 2022, that number rose to 8.5%, which no one prepared for. Across the board, high inflation translated to higher expenses, or a greater outflow than predicted or budgeted, which resulted in greater cash outflow but without the inflow to level things out.

Smooth Sailing Is the Key To Succeeding for Small Businesses

The key to weathering unanticipated economic conditions like inflation or a recession is to maintain consistent cash flow. Doing so helps ensure financial obligations can be met by a business and opportunities to save or get ahead don’t need to go unclaimed. Consistent cash flow has a bigger-picture benefit, too: it can also simplify the transition back into a post-recession economy.

If expecting the unexpected sounds impossible, in this instance, it may not be. While the last recession (2007-09) came with minimal warning and resulted in a rapid, drastic outflow in some situations, a possible recession in 2022 or 2023 has dominated the news for months, as noted by financial industry leaders:

“I’ve become more pessimistic about the opportunity of stabilizing inflation at an acceptable level..."  JPMorgan Chase & Co. chief economist Bruce Kasman (June 12, 2022)

In addition to advanced notice, the economy itself is in a different situation today than it was in 2008, Jay Bryson of Wells Fargo told The Economist earlier this year, and credited this to these 4 factors:

  1. Consumers currently have less debt and more savings on average than they did in 2008
  2. The end of Covid-related restrictions is pushing consumers to continue to take on “non crucial” expenditures, which includes travel, housing, and non-essential retail.
  3. Banks and financial institutions have a “plumper margin of safety” than they did in 2007.
  4. The US dollar is stronger today than it was from 2007 to 2009.

While these economic factors alone don’t negate the effects of a recession on businesses, they may simplify cash flow management during a recession for small business owners and in the integral rebuilding phases that follow, particularly when paired with business-appropriate strategies.

Small Business Economic-Preparation Strategies Can You Prepare Your Business for the Unexpected?

Which strategies best prepare a business to navigate a pandemic depend largely on the business’s current situation and future goals. For example, a business owner focused solely on meeting financial commitments today may opt for different preparation strategies than a business owner who’s also targeting acquisition, expansion, or growth during a recession.

  1. Increase prices. Frequently this is the instinctual first step of businesses aiming to curb their increased outflow due to inflation and other factors in a recession. The CNBC survey determined that 40% of small businesses are already raising prices to combat higher costs. But more than half of the respondents aren’t. Thirty-five percent of the 2,000 small businesses surveyed said that they believe it’s a bad time for their business to raise prices, and nearly one-quarter intend to simply eat the increased costs themselves. Note, too, that increasing prices sometimes has an unwanted side effect: increasing costs of products and services can result in a lower quantity of goods/services sold and may position a competing business that doesn’t increase costs to lure away more price-conscious customers.
  2. Reduce spending. Reducing outflow by cutting back on expenses also helps manage cash flow, although cuts should be made carefully and strategically since cutting expenses by reducing the investment in raw materials or other resources can limit output or impact quality, either of which can also trigger a reduction in inflow. Expense reductions that result in scaling back production can lead to a loss of market share after a recession, too. Some business owners take a different approach in an attempt to reduce costs: they cut their own salary. For most business owners, however, this isn’t a practical solution. A better solution is to enlist an accounting tool that can identify opportunities for expense trimming while also seeking advantageously buying (i.e., bulk) as opportunity arises.
  3. Have a credit line available. The New York Fed noted that during the financial crisis of 2008-09, small business owners often turned to personal home equity loans to support their businesses amid lender pullbacks. Better options are available today for small business owners, however, including business lines of credit.  Preparation borrowing can improve approval likelihood and eliminates the concern of a recession-triggered drop in credit score, which accompanied the previous recession. Unlike a loan, borrowers using a line of credit only pay interest on the portion of the credit line that they use and when they use it. Lines of credit may also provide access to funding quickly for business owners, which makes them a more flexible means of preparation borrowing than more traditional financing, like an SBA loan.
  4. Diversify offerings and/or become “essential.” Businesses that sell “non-essential” goods or services are typically impacted harder by a recession. To attempt to recession-proof a business, diversifying offerings to become more “essential” could mean:
  • Providing critical repair goods and services. During 2008’s recession, home improvement stores saw their businesses boom as consumers opted to update existing abodes rather than sell.
  • Selling consumer essentials, including food and other staples rather than luxury items.
  • Serving customers “insulated” from downturns (often high-income clients).
  • Providing mandated products or services. Think Zoom, for example.
  • Selling proprietary or specialized goods or services, as was the case in 2008 when Netflix and other non-essential subscription services managed to grow rather than fold.

Note that diversifying doesn’t always mean growing. A new product or service can also replace an existing service that isn’t seen as key to a business’s brand or product line. BTW, not all industry sectors experience the same impact during a recession: according to a June 2022 report from Bank of America Institute, consumer spending in certain sectors, including food, tends to take less of a hit than durable goods and travel, which experience larger declines, although as noted previously, thanks to the end of pandemic-related shutdowns, travel may not experience the impact that it normally would if the economy slows in 2022.

Can You Prepare Your Business for the Unexpected?

It’s safe to assume that all business owners have fingers crossed that the U.S. economy will avert a recession in 2022 and 2023. But business models built on hopes and wishes don’t hold up quite as well as solid and proven preparation tactics. The best step to take before a recession happens? Get your ducks in a row. Focus on cash flow and ensure yours can remain consistent, regardless of what the rest of the year throws your way.

 

Lendio is the nation’s leading small business financial solutions provider. With its diverse network of lenders, Lendio enables small business owners to apply for multiple business financing options with a single application. The company has facilitated more than 330,000 small business loans for more than $13 billion in total funding, including $9.8 billion in PPP loan approvals as part of government COVID-19 relief. Lendio has become the fintech company to watch in the industry, helping reduce bias in lending and cut back on loan approval time exponentially. In addition to creating access to small business capital, Lendio offers time-saving financial SaaS products designed to streamline business operations. Lendio is a mission-driven organization striving to provide equal access to capital to underserved communities and America’s smallest businesses. For every new marketplace loan Lendio facilitates, Lendio Gives—an employee-contribution and employer-matching fund— in partnership with KIVA, Lendio provides a microloan to low-income entrepreneurs around the world, continuously re-investing the fund. In addition, Lendio ranks on Fortune’s Best Workplaces in Financial Services & Insurance and Inc.’s Best Workplaces three years in a row. More information about Lendio is available at www.lendio.com

 

 

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