This article first appeared in the April 2019 issue of Wedding Planner Magazine.
Your business is likely not recession-proof. Most consumer products and services are impacted when the economy takes a dive. I know this not only from my years as a stationery business owner but also from my experience working in the fashion industry. When the economy takes a dive, every middle-to-high-priced consumer-driven business suffers. But, they do so at different scales. In the last few years as our economy ebbs and flows, my focus has been to prepare event businesses for the next economic downturn. Here is what you need to know.
The Middle Market is Hit the Worst in a Recession
Any industry that services the middle class is always hit worst by the recession. Wealthy people tend to remain wealthy during a downturn. They have cash reserves that middle and lower-income individuals do not. The middle class cuts back on spending and begins to spend like the lower class. People who once shopped at middle-market brands (Gap, Banana Republic, Macy’s, etcetera) now find themselves shopping more often at Target and Walmart.
The lower economic end will continue with frugality as always, completely cutting out any premium products or services they may have once splurged on. Low priced brands do very well during a downturn because they are now able to capitalize on all of the middle income that has shifted their dollars towards them. (Keep in mind, in the wedding industry, it’s incredibly difficult to build a profitable business with a low-priced service. But, that’s a topic for another day.)
Here is the interesting thing that happened in the wedding industry during the last recession: Even high-end couples changed their approach towards events. The country was suffering, and so as not to appear insensitive, simplicity took over people’s styles and tastes. No one wanted to appear flamboyant and grandiose. Out went the big glitzy weddings; in came understated elegance. (And, you thought rustic chic and barnyard weddings were fashion choices of the late 2000s.) With that understated elegance came simpler decorative choices. “We don’t want to appear ostentatious” was the underlying emotional driver of these decisions. Even the people who had money didn’t overdo it.
Your business, regardless of the price point at which you sell, will be impacted by a recession. So, how can you best prepare yourself?
How to Prepare for the Next Recession
1.) Create a Savings Cushion
The best way to prepare yourself is to have the cash to cushion the rough times. You should plan savings to cover approximately three months of business expenses. However, every business is different, and every owner has a different comfort level. Some owners will feel fine with one to two months’ worth of savings, while others will want to have greater comfort with six months’ worth of expenses saved. The important thing is to start squirreling away money for slow times.
This goes for your personal finances too. You may find yourself in a situation where you have to cut back on your salary, or cut back on your owner’s draw. If you’re putting less money into your personal pocket, you’ll need to make sure your personal finances can accommodate that decrease.
2. Get Rid of Business Debt
Business debt will tie up your cash in ways that will strangle your business when things slow down. If you’re paying $500 per month on a credit card or loan, imagine what that will feel like when you have less money coming in. Getting rid of that monthly obligation can be what saves your business when sales inflow relaxes. Pay it off now in anticipation of the future.
3. Cut out Unnecessary Expenses
You want to become very intentional with how you spend your money. Cutting back on your expenses now will not only free up cash for saving, but also builds the habit of doing with less.
Here are a few expenses you should consider cutting back on:
- Rent – if your business model doesn’t require you to be in a space, then move your office into your home
- Payroll – this one is tricky because cutting back on staff isn’t usually a viable option, but you can likely be smarter about how your employees are spending their time. If you have 5 employees and you cut out only 3 hours weekly for each, you could save ~$12,000 per year on payroll (assuming they earn $15/hour). This is one area where small changes really do add up.
- Advertising – if something isn’t bringing in business, cut it out. HOWEVER, don’t cut out all your promotional investments. During a recession, you’ll need to market yourself harder than ever. Promotional dollars aren’t necessarily the first place to cut. BUT – you should examine the return on your marketing dollars to see what’s bringing you the most bang for your buck.
- Software subscription services – those automated charges are ones we hardly even notice after a time. Now is the time to do a big review of all those $10s and $20s you spend monthly and chop the ones where you aren’t maximizing their benefits.
And, lastly and most importantly, work on a cash flow plan. Cash flow planning will give you clarity on your cash inflow and outflow. It will show you exactly when you will have slow months in your calendar, and when you will be more fluid. Foresight will give you the ability to quickly shift your business around rough patches. If you aren’t planning, you won’t be able to see when bad times are on their way.