How Small Businesses Can Conserve Cash During a Downturn

February 10th 2023

Ask a group of small business owners whether we’re in a recession and you’re likely to get a variety of answers. Although we’ve been hearing about an impending recession for months, it’s unclear if it’s on the horizon, already here, or if the chances of it occurring have receded.

If you’re nervous that a business downturn is headed your way, recession or not, there are a few things you can do to soften the blow if sales do decline. 

So, what can or should you cut back on? To figure that out, you need to take a look at your spending history.

Audit Your Spending

To know where your money is going in your business, the best place to look is at your business bank account(s). What kind of sales have you been making, are they on an upswing or downturn, and what do your expenses look like? Go back through the last three to six months of checking account statements to see what you’ve been paying for.

What are the biggest categories of expenses? Depending on your business model, that might include your rent, utilities, labor, equipment leases, raw materials, inventory, marketing, or many other possibilities.

Make a list of your biggest types of expenses and then consider what your business could do without. That is, where could you cut back, even temporarily, to build up some cash reserves? You don’t want to cut essentials—must-haves that keep your business in operation— but are there other types of expenses that aren’t absolutely necessary?

I’m thinking of things like:

• Subscriptions (magazines, newspapers, office supplies, water, software)
• Meals and entertainment (for clients, employees, managers)
• Fees you could avoid with some planning (overdraft, late charges)

What could you eliminate even for just a few months?

Use Up Your Stockpile

Many businesses have built up a stash, or a stockpile, of products they use regularly, to avoid having to interrupt production or sales when the product runs out. Some have as much as six months of some products on-hand, just in case. But do you really need so much?

To benefit your bank account, consider: 1) using up your stockpile before reordering and 2) consider not stockpiling as large a quantity. For example, if you have six months on hand, could you get by with three or four months instead? That would allow you not to buy any of those items for a couple of months, which would reduce your cash outflow.

Another tactic to try is to negotiate with suppliers to lock in rates on recurring purchases, such as office supplies, packaging materials, or food ingredients, for examples. That way you can reduce the impact of a potential price increase.

Ask to Extend Payment Due Dates

If you’ve been paying bills immediately, or even Net 30 (within 30 days), it’s worth asking your suppliers if you can get Net 45 terms instead (meaning you’d have 45 days to pay your bill). Of course, you still have to pay the bill, but pushing out when you have to write some checks gives you more flexibility regarding how to use the money that’s in your bank account.

On the flipside, you could also ask your customers who are paying Net 45 or Net 60 to pay sooner. You may have to offer a small discount for this, but getting what you’re owed faster can sometimes be worth it.

Review Your Hiring Plans

Your workers are essential to the continued operation of your business, so it’s unlikely you’ll want to let anyone go if you don’t have to. However, if you had planned to add new employees this year, there may be some alternatives to adding headcount.

Some of these options include:

• Offering existing employees overtime hours
• Exploring hiring college or high school interns for course credit
• Temporary workers
• Seasonal workers
• Independent contractors 

Other ways to tighten your proverbial belt could be to shift spending online.

Move Activities Online

Even brick-and-mortar businesses that serve customers in person, such as restaurants, auto repair shops, daycares, beauty salons, and retailers, can take steps to move some in-person tasks online and save money. That doesn’t mean you have to stop offering in-person selling, only that you could replace some face-to-face work with an online equivalent to save some cash.

This could include:

• Adding an online store for products, parts, gift cards, courses, and information products in order to reduce on-site staffing needs
• Offering training online, rather than on-site meetings and classes (which can also expand your target market globally), and encouraging employees to consume their education online, too, to reduce travel expenses
• Shifting some traditional marketing dollars online, such as to a website, social media accounts, and digital ads, to reduce reliance on paper-based purchases.

Whether a recession hits or not, fortifying your financials by reducing unnecessary spending and finding less expensive ways to access the resources you need is a smart strategy for improving profits.