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These are the reductions a company needs to make when it hits a recession

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Damircudic | E + | Getty Images

Many small business owners are already cutting down in the wake of the recession, but more trimming may be needed to survive the brewing economic storm.

US economic growth fell 0.9% in the second quarter, the Economic Analysis Department reported Thursday. This is the second consecutive quarter of negative GDP. It’s not a technically accepted definition of that change in the business cycle, but it will stir up fear that the economy has entered a recession. Federal Reserve Chairman Jerome Powell said Wednesday that he does not think the economy is in recession.

Some SMEs are already retreating, based on signs of slowdown. SME spending on electronic devices fell by 59% between May and June, according to a report released Thursday by financial automation platform Ramp. According to the report, many SMEs spent 28% on shipping, 14% on advertising, and 11% on SaaS and software purchases over the same period.

Brian Moran, CEO of Small Business Edge, who provides guidance to small businesses, said:

Finding a way to trim fat without cutting into the meat of the business is a challenge for many owners. Here are three tips for surviving a recessionary environment.

Conduct a self-audit of spending

Self-auditing is the first order in a business, as owners do not always know exactly what they are spending money on. Carissa Reiniger, founder and CEO of Silverlining, advises and lends small businesses, using the last three bank and credit card statements to make a small but meaningful statement. Identify areas where certain reductions can be made.

For example, your business may have subscriptions to unused or underutilized subscriptions, apps, software, or network groups. These costs can actually add up, especially if you are paying per person. She also said she would look at other recurring costs such as telephone services, utilities, and bank account fees to see where certain costs could be reduced or eliminated.

“I think the average small business can save 20% on costs without feeling a pinch,” says Reiniger. Don’t be afraid to negotiate. She said SMEs have more bargaining power, especially in turbulent economic conditions.

Find out supply chain costs and inventory levels

David Quinn, chief financial officer of bank FinTech Bluevine, said small businesses should also negotiate with their suppliers. When discussing these, consider whether there is something you can offer to your supplier that no one else has. Also, think about whether you can establish a transaction that is useful to both parties. Some suppliers may not be willing to mediate the transaction, he said, in which case there may be other options to reduce costs, such as discounts on bulk purchases.

It is also a wise move to reduce upfront investment. Petersey, Senior Wealth Advisor at Citi Global Wealth, has clients in the commercial lighting business who may have kept inventories of light bulbs, wires, etc. for 6-9 months in the past. Currently, clients are ordering at most 3 months in advance. The client also negotiated with the supplier to fix the price of a particular product. “Inflation can raise prices by 20% to 30% in three months, so that’s another thing they think and plan for,” says Shieh.

Saves cash, but is strategic, especially for workers

One tactic to save cash is to pay the invoice near the due date instead of 15 or 20 days in advance, or request a longer payment period, such as 60 to 90 days instead of 30 days.

Matt Armanino, CEO and Managing Partner of Armanino LLP, an independent accounting and business consulting firm, said he would also consider real estate costs. If your lease is about to end, consider your hybrid or remote work trends and consider whether you really need a footprint you own. Or, for long-term leases, is there an option to sublease a portion of the space?

For most small businesses, employee-related costs are the highest, so trying to reduce costs is an easy place. Do not jump the gun. The cost of hiring and retaining talent is currently particularly high, so letting go of people unless really needed can be “wise and pound stupid,” Armanino said.

Joshua Oberndorf, Eisner Amper’s Certified Accountant, should consider dismissing a worker instead of dismissing it altogether if other methods still need to keep costs down. Tell them how valuable they are to your business and your intention to bring them back as soon as possible, he said.

She may also consider acquiring a small business credit line that can be used as a short-term bridge. According to NerdWallet’s Fundera, SMEs may expect an average of 7% to 25% APR with this option. The rates are higher than they were six months ago, for example, but he said it would be nice to have access to lifelines as needed. There are other options for financing small businesses, such as friends and family, online lenders or funders, and SBA loans.

Invest for productivity, cost savings and future returns

Find out which parts of your business can be automated or digitized. For example, you can deploy a chatbot to reduce customer service costs or switch to online training instead of onsite. For example, Armanino’s company did the latter, and the move paid off within a few quarters.

He said he might have to spend a little money in advance to achieve long-term cost savings. This is true even in a recession, especially if cash used elsewhere can be relocated for these purposes, he said.

There is a temptation among many small businesses to stop marketing in a recession. Don’t fall into this trap. Consider a McGraw-Hill Research survey that analyzed 600 companies from 1980 to 1985. As a result, companies that continued to spend marketing during the two-year recession boosted sales significantly. And by 1985, those who actively advertised during the recession recorded significantly higher sales than those who dropped the promotion prematurely.

“I don’t want to block communication with customers. That’s my future income,” Auburndorf said.