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The pandemic has had a major impact on the world economy with small and medium Main Street businesses taking the heaviest blow. But for those that managed to survive, it’s time to start preparing so you can turn the next economic downturn into an opportunity to get ahead of the competition.
I’ll share some tips and actionable advice in this article on how you can take advantage of the shifting economy to stay ahead of the curve in case of another unforeseen crisis in the future.
Let’s get started!
Tip #1: Strengthen your emergency fund.
A general rule in financial planning is to keep an emergency fund that covers three months of business expenses. However, if there’s something we learned from the pandemic it’s that three months may simply not be enough, especially for some retail stores, restaurants and other businesses that operate on Main Street.
While it’s obviously impossible to predict exactly how much you’ll really need to keep your business running during the next downturn, you should aim to make your emergency fund as robust as possible, with three months as a bare minimum, aiming to save at least twice as much.
Tip #2: Consolidate all bad debt and make a payment plan.
Most people rely on credit and loans to grow their businesses, and this is also true for Main Street businesses. However, debt can be a serious burden if it comes with high interest, potentially turning into bad debt you’re unlikely to pay, which will severely hurt your credit rating.
You don’t want to be caught in the middle of a recession with a huge pile of debt, so you need to find a way to pay it all off before the end of the next business cycle. If your business has several high-interest loans, it’s a good idea to consolidate them all in a single loan. These debt consolidation loans usually offer much better interest rates than the original loans, helping you save money down the line. Additionally, they also offer the benefit of paying all your debt in single payments every month instead of having to juggle several payments at once.
If part of your balance comes from credit card debt, another option is to get a good business credit card with an introductory balance transfer offer. These cards offer an interest-free grace period on balance transfers that varies from several months to up to 2 years. If you believe you can pay off your debt in 24 installments, then this is without a doubt the best way to go since you’ll avoid paying any more interest.
Tip #3: Know your business’s expenses in detail at all times.
One of the keys to managing any business is to manage costs effectively, and in order to do that, you need to have a clear view of where your business expenses lie. What isn’t measured isn’t managed, as management guru Peter Druker once said, so if you want to do anything about optimizing your operational costs and other business expenses, you must know what those expenses are. This will be the basis upon which you’ll be able to act quickly in the future if you ever need to cut costs.
Tip #4: Use the Pareto principle to identify where cutting costs is more impactful.
Once you have a good idea of where all the money is going, it’s time to assess which part of those costs has the highest impact on your business’s performance and bottom line. It’s normal to want to cut costs when an economic crisis hits, but you shouldn’t do that just for the sake of it. Cutting costs is something that you need to be mindful of since it can have a very negative impact on your business if done wrong.
In this sense, cutting down on all your costs is usually not a good idea, nor is it necessary in most cases. The Pareto principle, also known as the 80/20 rule, states that 80% of your business’ outcomes come from only 20% of the causes, i.e., of the costs. This implies that, in principle, you could cut down on about 80% of your costs, and your business’ output would only decrease by about 20%, therefore improving your bottom line.
The key is not necessarily to work on cutting those costs before the next crisis but rather to have a clear plan of action for when the crisis hits. This is where the next tip comes in.
Tip #5: When the next downturn shows its teeth, act early.
The Harvard Business Review analyzed over 5,000 companies and how they acted during four consecutive business cycles. The study determined that the ones that consistently come out on top after each crisis had one thing in common: They all acted quickly and early. This is, in part, the reason why the previous two tips are important. Knowing your expenses and having a plan to cut down your expenses when necessary will let you act quickly and more effectively than your competitors when the time comes.
It’ll also allow you to consider other options besides laying off your employees, which nobody wants to do, particularly during times of economic uncertainty.
Tip #6: Move as much of your operation online as possible.
Reality has changed with the pandemic, and the new normal is here to stay. More people than ever are working, doing business and shopping online, and this is something you need to take advantage of to be competitive in today’s and tomorrow’s market. However, it’s fairly common to see Main Street businesses like small retail stores, restaurants and shops focus solely on their physical stores and neglect the opportunity that the internet offers.
In order to be better prepared for the next pandemic or other international crisis, you’ll want to start working on your online presence. This means, among other things:
Setting up a website.
Setting up your business’ social media.
Setting up a scalable eStore.
Switching to an online bank.
This isn’t about going fully online, setting up a virtual address and taking your business remote. In other words, this isn’t about killing Main Street in favor of e-commerce. The point is to put the mechanisms in place that will give you a head start and let you adapt faster to working from home in case of new lockdowns. Taking these measures will enable you to carry on with your business with only minimal adjustments while being able to manage everything remotely if you need to.
Tip #7: Diversify your products and services.
If you want to have a more resilient business that will get by no matter what, it’s a good idea to diversify your products and services. This is the equivalent of not putting all your eggs in one basket. Suppose your business only produces or sells one product or service, for example. In that case, anything that negatively impacts the sales of that product or service will directly affect the entire business. On the other hand, if you diversify and offer more products or services, then having just one of them crash won’t send you into bankruptcy since the other products can help keep your business afloat.
The bottom line
While the thought of going through another downturn may be scary to many Main Street businesses, it’s important to learn from past experiences and to use that knowledge to improve your chances of success when it happens again. Knowing where and how to cut costs ahead of time and acting quickly as soon as a crisis hits are two important factors that play into successfully riding the wave. On the other hand, diversifying your business to make it more resilient, beefing up your emergency fund and getting rid of bad debt are some of the most effective ways to turn crisis into opportunity.
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