More data is coming out to suggest that an economic slowdown is occurring. Gas prices are rising. The Federal Reserve is raising interest rates the fastest since the 2009 recession. Small business owners are increasingly concerned about rising inflation. It’s going to be okay. You just need to recession-proof your business.
We’ve talked to many business owners who found ways to beat the odds when federal and local governments closed down the economy during the pandemic. One of my favorites is Jazmin Richards, who started Blk Sunflower with less than $100 after losing her job at the beginning of the pandemic and made $300K in less than 18 months.
We’ll share insights about preparing your small business for an economic cycle with slowing growth. We’ll discuss what to do when a recession hits by discussing:
What happens in a recession?
A recession is typically considered at least two consecutive quarters of declining GDP growth, which means that the U.S. economy is currently in a recession.
Recessions have occurred when the economy falters, and you will normally see:
- Eight to 12 months, or three quarters of declining demand. (The longest was the Great Recession at 18 months.)
- Unemployment rising to over 5.5%, but potentially as high as 10.8%
- A 4% to 6% decline in year-over-year GDP, which is calculated on a modified income statement.
The nationwide shutdown in 2020 was an exception to the rule because it was only two months long, but unemployment rose to over 15% and GDP dropped 3.5% in 2020 because of the closures.
During recessions, businesses and consumers change their behavior to adjust to the downturn. Economic research shows that people and businesses tend to make the following changes:
- People and companies reduce discretionary spending.
- People look for ways to earn extra income.
- Some increase their savings if they have extra income, then savings account balances decrease.
- Companies reduce hiring and then cut jobs when they cannot cut costs any more.
- The stock market declines.
- Banks increase requirements for loans and reduce lending to prevent defaults.
- Total personal income decreases.
- The Federal Reserve normally lowers interest rates, but interest rates, gas, and supply chain issues are responsible for the current decline in GDP.
Next, we’ll discuss how businesses can make it through recessions.
What is recession-proof?
Recession-proof is a term used for a company, job, or industry that is considered less impacted by a downturn in the economy. Business owners, investors, and consumers will tend to gravitate towards the sectors of the economy that are not impacted by a recession. These businesses include:
These are all industries that see stable or increased demand. Other industries would be recession-resistant because they are less damaged by recessions than others. For instance, health care has a certain resistance level because essential care will never disappear. A diabetic that stops taking insulin will die, so they keep taking it even if they can’t afford the medication.
What jobs are recession-proof?
For people looking for long-term job security, you might want to consider these investment-proof jobs when you fall on hard times:
- Teachers: Elementary through high school education doesn’t stop because a recession occurs. According to Capital News Service, most recessions create increased demand for higher education because more consumers want to increase their job prospects by investing in their education. 2020 was an exception because people were worried about the transmission of COVID.
- Health Care Professionals: Nurses, doctors, and specialized care providers are also recession-proof careers. This goes for therapists, psychiatrists, and social workers, too.
- Government Employees: Jobs like firefighters, police, first responders, and social workers that work for the government are normally recession-proof jobs because the demand for their services stays the same or increases during a recession.
- Public Service Jobs: People still need garbage pickup, electricity, water, and other essentials to keep their home and community livable so these services make it through a rough patch virtually unscathed.
- Financial Service Providers: Taxes still have to be made, and auto insurance is still required by law. There have been two bank runs in the last hundred years, and the last one saw massive numbers of bailouts. Make sure to go with a conservatively run financial institution, and you should be fine.
When a recession hits, you won’t want to be heavily invested in new construction, home furnishings, car sales, travel, and printing businesses because they are the least recession-resistant services.
What companies are recession-proof?
Companies that do well during inflation tend to supply needs, not discretionary goods and services. Investors tend to look for recession-proof stocks during recessions. These will normally be companies that are in the industries mentioned above. They may also look for stocks with low debt-to-income ratios or investments with better interest and dividends.
U.S. News recommends these electronically traded funds to get stock picks that are recession-proof investments:
- Vanguard Total International Stock ETF (VXUS): Every country has different economic conditions. International investing can be done at a discount when the dollar is strong. When the dollar weakens again, you can see huge gains in these stocks.
- Vanguard Consumer Staples ETF (VDC): These are a mix of Procter & Gamble, Coke, Pepsi, Costco, Walmart, and other companies that people buy from regardless of uncertainty. Economic data show that these companies have built a recession-proof business.
- iShares 0-3 Month Treasury Bond (SGOV): Short-term bonds are currently performing better than long-term bonds. The peak levels are at the two-year mark. You can buy them on Treasury Direct if you prefer.
- Schwab U.S. Dividend Equity ETF (SCHD): Dividends are like interest paid on stocks, but you can opt for dividend reinvestment to increase your equity. When the prices go back up, you have more stock.
- Health Care Select Sector SPDR Fund (XLV): Healthcare spending is a major piece of the economy, regardless of what the rest of the market is doing.
- Vanguard Utilities Index Fund ETF (VPU): As we’ve mentioned previously, utilities are recession-proof businesses.
- SPDR Gold MiniShares (GLDM): Many people invest in gold to hedge against inflation when they see uncertainty.
- Vanguard S&P 500 ETF (VOO): Recessions often occur in different areas at different times, so investing in international stocks might pay off.
Coin laundromats also do well because people still need to wash their clothes. Watch our interview with a laundromat owner below.
What are recession-proof Industries?
Industries that do well in a recession include:
- Grocery stores: They sell food, and it’s the absolute last thing in life people can give up.
- Convenience stores: People always need gas to get to their job, and most gas stations have a contract with the gas company where the gas company keeps the gas revenue, and the market keeps the profit from the products in the store.
Check out our interview with a gas station owner who turned a $1 million investment into eight gas stations in three years. If you have the funds to invest, it’s one of the industries that do well in a recession.
What to do in a recession?
During a recession, you want to pay more attention to market data. The average duration of a decline is short enough that most businesses can ride it out and make a profit over the long run. To make sure you have the best chance of navigating a down market, consider the following ideas:
- Save money as soon as your company is running a profit.
- Create a subscription service; it tends to increase the average revenue per client.
- Pay off debt every month so you can ride out a down market.
- Keep a look out for amazing investment opportunities for your portfolio. Sometimes people sign over their business just to keep from declaring bankruptcy.
- Sell underperforming assets.
- Renegotiate with vendors and landlords.
- Don’t buy anything you don’t need.
- Ask your employees to help. Dan Price almost had to lay off 20% of his company, but his employees opted for pay cuts. Everyone kept their jobs, and he paid them back after they weathered the storm.
- Lower profit margins if necessary. Sometimes lower prices will matter enough to keep customers you would lose otherwise. Remember when everywhere offered $10 pizza? Pizza places used that strategy to protect their stores from closing. Then, after the 2009 recession passed, pizza prices gradually doubled.
- Consider reducing the products and services you offer. Alternatively, add products and services businesses have requested.
Each business is different, but you should always be prepared for a recession. Industries tend to consolidate during recessions. The smallest businesses shut down and bigger businesses look for merger opportunities.
During the great recession, banks holding 6% of total deposits shut down, leaving greater profit opportunities for the ones that took over their assets. During the same time, 2.4% of small businesses shut down. If you have the funds, a recession can be a great time to expand.
Next, we’ll examine what to do with your money during a recession.
What to do with your money in economic downturns
I don’t think anyone would advise hiding your money in a mattress. If you need it quickly, leave it in your savings account. Otherwise, you can consider investing in stocks, bonds, or businesses.
One common reason why people lose their retirement funds is they pull out of their portfolio when it’s too late. Don’t do it. If you’ve already lost more than you are comfortable with, ride it out.
If you think your portfolio has reached an all-time high, just turn it into cash and wait until the market hits a bottom. All time highs are the safest time to pull out. Like Warren Buffet said:
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
Look for great buys after leading indicators show a sign of change. Leading indicators are business statistics like:
- Purchasing Managers Index: Shows companies are buying materials.
- Durable Goods Orders: Shows demand for industrial products.
- Jobless Claims: Weekly and monthly reports that show how many unemployment claims are being filed. When both weekly and monthly align, it is a good thing. Weekly will show changes first, but monthly will show confirmation that the weekly wasn’t an anomaly.
- Consumer Confidence Index: This shows how confident consumers are. If consumers are confident, the economy will likely trend higher unless unforeseen events occur.
You can find most economic reports on the Census website.
Treasury bonds have durations of one month to 30 years. They are some of the safest investments in the world because the faith of the U.S. government backs them. Treasury Direct also sells TIPS, which tracks the consumer price index, and I-bonds, which are a combination of fixed rate and variable rate.
They are both long-term bonds, but TIPS can be sold on the open market. These are the best options if you want to earn some interest in safe investments.
When businesses start going under, it’s your chance to get assets at ridiculously low prices. People who bought neighborhoods in Las Vegas for $50K per house have turned $1 million investments into $8 million or more.
The same can be done with businesses. Just make sure you are analyzing the business strategically. Be cautious when they don’t have documentation of their debts. Read our blogs about buying a business, including:
Next, we’ll discuss how to protect your business during a recession.
How to protect your money in an economic downturn
Protecting your financial stability is critical during recessions. We’ll discuss a few options to protect your business funds.
Increase Savings Rate
Reduce your salary and keep the savings in an interest-bearing account. It may not save a ton, but you’ll weather the downturn if you save more money.
Decrease Unnecessary Spending
Everybody has waste. Whether it is making your employees drive the vehicle back to the shop, buying too many supplies, or having weekly team meetings with a huge lunch budget, there are bound to be expenses you can cut.
Reduce Employees Hours
If your business has multiple employees, you can reduce their hours. Try to do it fairly because nobody likes being singled out. If you value the employees, you want them to stick around until the money starts flowing again.
Some air conditioning companies offer pay packages that allow you to bank your overtime for the slower months. It helps your employees maintain a more simple budget year round. It also helps you earn more interest.
Reduce Employee Pay
Most employees would rather take a pay cut than find another job. If you do this, try to reward them when the business recovers by paying them more than when they agreed to the pay cut. If you don’t, you’ll be hiring just when you thought you had weathered the storm.
Nobody loves firing people, but you can lay off people. If you have to do this, you’ll still be paying a percentage of their wages. They might even come back if you invite them back when business picks up.
How to make money during a recession
Making money during a recession is the same as any other time. You just have to be more determined. Assuming you meet normal business profit margins, you’ll probably barely make a profit. There are some things you can do to help prepare to make more profits once the recession passes.
Systemize Your Business
Make the best of a slowdown. Recessions are times to look at how you can improve your business. Start with these:
- Automate accounting and bookkeeping.
- Improve your marketing strategy.
- Add a subscription plan.
- Review your services to see which ones lose your money.
Get Rid of Underperforming Assets
Look for items you don’t use and get rid of them. Some low-hanging fruit might be:
- Work vans that are in the shop too often.
- Scrap metal you never took to the recycling yard.
- Equipment you bought thinking you need it, but you never use.
You can run promotions to current customers if you aren’t getting enough business. You can also visit sites that help customers find skilled contractors or freelancers. It might not pay as much upfront, but it will help make money while business is slow.
Develop New Skills
There are a lot of businesses that have similar skills and tools. For instance, a pressure washer that does driveways could also wash cars or building windows. Taking on new skills will diversify your income and help you be better insulated for the next recession.
Keep Your Morale Up
During downturns, people tend to have more anxiety, depression, and sometimes a single rough spot can destroy a person’s life. Don’t let that happen to you. If you feel down, go for a walk, see a friend you haven’t seen recently, or get a therapist to help you think through your experiences.
Just do something to keep your mind off your struggles. Some things are beyond your control. I hope this blog has helped to give you some ideas about how to recession-proof your business.
What strategies have worked best for those of you who have run a business through multiple recessions?