5 Steps to Strengthen Your Business During a Downward Economic Cycle

According to RBC Economics, Canada is headed for a mild recession. With the World Bank cutting its global growth forecast to nearly 3 per cent for this year and next — and the expectation that Canada’s key trading partners may be in recession next year — experts predict it will be difficult for Canada to avoid its own downturn.

Recessions are significant, prolonged and pervasive downturns in economic activity typically lasting six months or more; however, the possibility isn’t dampening the outlook of Canadian business owners too much.

According to the Bank of Canada’s latest Business Outlook Survey, business owners continue to expect strong sales growth and are optimistic about hiring and investing in their businesses. Yes, there is uncertainty about persisting inflation, continuing supply chain issues, the ongoing war in Ukraine, and the pandemic’s evolution. But while owners see these risks, they are not yet affecting operations, sales or even business owner optimism.

With RBC Economics expecting Canada’s GDP to be less than 1 per cent growth in 2023 and the jobless rate rising by nearly 1.5 percentage points by the end of next year, owners should be prepared for the potential effects of a recession. Typical challenges businesses face in recessions include reduced consumer buying power, more expensive debt, delayed payments on invoices, and declining sales.

Here are five steps to help future-proof your business and weather tough economic times.

1. Forecast a range of scenarios

If the last few years have taught owners anything, it’s that the unexpected can happen. Canadians have been riding a wave of uncertainty for a while — and when you’re not sure what will happen next, it becomes essential to prepare for various scenarios.

During such times of uncertainty, business scenario planning is a tried-and-true tool for business owners. Often defined as “what-if” planning, business scenario planning involves making assumptions about what the future will bring to understand how different situations may affect your business.

For example, if half of your customers decided your product or service was a luxury they couldn’t afford, how would it affect your cash flow? If a key supplier went out of business or the cost to service your debt rose too quickly, what impact would that have on your ability to run your company?

Scenario planning allows you to detect pitfalls, cash gaps or cracks in your business’ foundation before they happen.

2. Find ways to keep more money in your business

The old adage ‘cash is king’ has never been truer. For a business, maximizing the cash coming in while reducing the cash going out is even more important in a downturned economy.

Reduce your costs

If you look hard enough, you’ll find opportunities to reduce the amount of cash flowing out of your business. For instance:

• Review your office space needs. If your in-person workforce has been reduced, consider downsizing your space to reduce rent payments.

• Consider gently used vehicles, computers or equipment instead of buying new ones. Be sure to check that warranties are still valid to protect your investments.

• Review inventory and product lines to know what is selling and where it’s best to spend your time and money. Items that sit for too long consume cash without bringing cash in.

• Negotiate supplier terms and/or consider bartering for products and services.

• Examine your monthly expenses and see if there is an opportunity to trim utility, internet or cell phone costs.

• Run through all the publications, tools and programs you’re subscribed to figure out if there are any you can discontinue or even put on hold for a time.

Leverage other sources of money

• Raise capital from either investors or relatives.

• Negotiate strategic payment terms with customers. For example, offering small discounts for up-front payments from customers can help make a difference to your cash flow, even if it’s for less money.

• Tap into money from government grants or business relief programs.

• Sell assets you don’t need. Whether you have a surplus in investments, real estate or equipment, now may be the time to divest to shore up your financial position.

3. Look at your debt

Studies show companies with high debt levels are especially vulnerable during a recession. That’s because the more debt a business carries, the more cash is needed to make interest and principal payments. Suppose customer demand falls and less cash comes in the door. In that case, debt uses up precious resources — not only putting you at risk of defaulting but also forcing you to cut costs more aggressively, impairing both your productivity and your ability to act on opportunities.

Now is the time to closely look at your debt and cost of borrowing and find ways to either deleverage or consolidate debt to a lower interest rate product. An RBC Account Manager can help you identify ways to optimize your debt.

4. Keep your customers and your employees close

A recent RBC survey of Canadian consumers and small business owners revealed that 65 per cent of Canadians polled report that they have transacted with a small business in-person or online within the last month. Moreover, 70 per cent of Canadians polled plan to spend more at local small businesses.

These statistics demonstrate that your customers want to support you. Finding ways to support them during difficult times will be important to keep them happy and engaged with your business. Get creative with how you reach them, how you sell to them and what you sell to them — consider emerging trends and communication best practices to give customers what they want.

In an economic downturn, owners immediately think of letting staff go to trim costs. While that may be a prudent measure when revenues drop significantly, your loyal team can help your business weather any bumps in the road. Ask them to share solutions to trim waste and install more efficient processes.

5. Invest in technology and digital solutions

While it may feel counterintuitive to invest in technology when money is tight, it may be a smart time to do so.

When the economy is thriving, you need to capitalize on your sales opportunities and produce as much as possible. But when you’re not operating at peak capacity, your operating budget may be freed up to fund tech investments without affecting sales. Digital transformation can help make your business more transparent, flexible and efficient.

Technology can help you cut costs and deliver improved analytics, so you can see how the recession affects your business even quicker.

Tips to consider:

• Explore online sales channels like virtual marketplaces to expand your customer base

• Install solutions that offer unified communications, collaboration and productivity business tools like Sherweb’s Unified Communications as a Service (UCaaS).

• Tap into big data to uncover trends in your industry and market. Platforms such as RBC Insight Edge for Small Business can give you real-time insights into consumer behaviour and purchasing trends

• Invest in an eCommerce-driven website to attract new customers and drive online revenue

• RBC mobile app: Log in to your RBC mobile app and apply for LoanProtector® Insurance on the account details page.

Bottom Line:

As the economy affects Canadians, the inflation rate cuts into families’ spending power. Essentials become more expensive, and costs are carefully weighed and prioritized. Whether your business offers essential products or services — or sells luxuries that delight Canadians — the right preparation can help you survive and even thrive during challenging economic times.

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