A Bloomberg poll in 2022 found that economists placed the chance of recession in the USA this year at 70%. Although more recent surveys have shown a drastic decrease in the likelihood of a recession in 2023, public sentiment still favors the idea that there will be a recession soon. Meanwhile, in the UK, the next recession may already have begun.

While we cannot say for sure which way the tide will turn in your region, those who prepare for the possibility of a recession are far more likely to make it out the other side than those who don't. Moreover, small businesses are particularly susceptible to harm in the case of a recession because of a general lack of financial cushioning and less leverage in banking, markets, and their industry.

In this article, we'll cover some ways you can protect your business against a recession if it does come knocking – and some ways in which you can come out even stronger!

Strangely enough, a small percentage (9%) of businesses come out of recessions stronger than they went into them. But what or who are these businesses? What strategies do they implement and can others copy them? According to research conducted by the Harvard Business Review (HBR) back in 2010, organizations that manage to attain the fine balance between reducing costs to make it through today and investing to grow tomorrow fare well after a recession. In particular, the HBR identified "a subset that deploys a specific combination of defensive and offensive moves" which "has the highest probability—37%—of breaking away from the pack".

Wouldn't you like to join their ranks? It's not impossible. In one of CFO, consultant, and podcast host, Kurtis Hanni's Frameworks & Finance newsletters, he argues that there are a number of important considerations when it comes to protecting your business against the harms of a potential recession and becoming part of the 9%. From his framework, we have collated our top 3 tips for recession-proofing your business:

Let's dig in.

Even without a recession, 82% of startups and small businesses fail due to poor cash flow management. There are a number of ways to avoid this. We recommend:

The HBR found that the 9% mentioned previously were not "the usual suspects". They weren't always the firms that cut costs the quickest or firms that invested more than their competitors. Moreover, 85% companies that led the pack in terms of growth prior to recessions tended to crumble during tough times.

Focusing predominantly on cutting costs can lead to a kind of "siege mentality" where organizations tend to aim low and restrict innovation. Moreover, when cutting costs, organizations often try to do the same amount of work with fewer resources instead of trying to find more efficient ways to operate.

On the flip side, over-investing can lead to a culture of optimism that results in a denial of the seriousness of a crisis such as a recession. The kind of organizations that take this route will brush off early warning signs, such as customers’ budget cuts, and will remain single-minded in the view that "as long as they innovate, their sales and profits will continue to rise". However, this is not necessarily the case.

Thus, neither the defensive nor offensive strategy is the answer to making it through a recession. Instead, the businesses who are most successful in times of crisis are those who prioritize operational efficiency, improving the supply chain and internal processes, and finding ways to automate time-consuming tasks. This also enables employees to concentrate on the business rather than whether they may be sacked tomorrow.

Some ways in which you can improve operational efficiency include:

The organizations in the 9% are not just smart about optimizing their operations; they're smart about optimizing their investments. As the HBR found, while their defensive moves (cost cutting) may be restrained, "their offensive moves are comprehensive". Companies that make it through recessions develop new business opportunities by making substantially greater investments than their competitors do in:

There are a number of areas in which you could be investing your time and money which will help you in a recession.

Investing in your employees means investing in the future of your company. Your human resources are vital to your business's success and employee turnover can be incredibly costly. By investing in training and development, you are more likely to retain your employees. After all, employees notice if you are investing in them and are far more likely to feel motivated in their positions and to want to help you find solutions when the going gets tough.

Moreover, by equipping employees to manage themselves, you can avoid micromanagement, the work equivalent of "helicopter parenting". This style of management has been found to lead to higher turnover, poorer collaboration, and even health issues. By empowering employees to be self-motivated and capable of working independently, you turn them into more effective, confident, and cooperative employees who are more likely to respect and value their managers to boot.

One example of a company that invested in its employees was when Google encouraged its staff to spend 20% of their time (or roughly 1 day per week) working on projects they were passionate about but which didn't have an immediate or obvious ROI. The result? Great innovations and products, including Gmail and Google Maps!

During the pandemic, it became abundantly clear that those organizations that already had tech structures in place such as cloud computing and online communications systems were far better equipped to tackle the challenges of working from home and more. Companies that use the latest tech tend to be more agile and able to adapt to the problems of the day.

Putting in place technology can streamline processes and save you a lot of time. Being proactive in implementing new technology may also lead to higher margins, which helps with resiliency during tough times.

One Forbes article suggests that it may be a good idea to "[use] crises to prepare for the future". The article notes the ways in which companies such as Zoom and Shopify responded to the pandemic by continuously developing their products and investing in new features for their applications. As the article puts it:

"The underlying pattern is easy to spot: The companies that were mostly unaffected by the pandemic were the ones already investing in innovative products."

The companies that did so well during the pandemic were companies that considered technology to be the primary driver of growth and innovation. Consequently, they weren't scared to invest in tech, even during the midst of a pandemic.

Investing in tech can be immensely beneficial when preparing for future storms, such as a recession. However, you must ensure that you do your research before you begin investing so that you understand where the market is heading.

While we can never be 100% sure when the next recession will be, it can't hurt to be prepared. With a good balance of defensive and offensive tactics, you can safeguard your business against future storms and invest in technology and people who improve your business.