The Right Choice Changes Everything
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January 21, 2023
That said, you would expect at least two recessions to have occurred since the subprime mortgage crisis (and housing bubble pop) that led to the chain reaction of business closures around 2008. But actually, business has been fairly good (for most business owners) since The Great Recession…at least, until now.
However, a recession is once again on the horizon. Technically, a recession is often defined as two quarters of negative economic growth. In practical terms, that means layoffs and unemployment, which means less consumer spending activity, which means less business profit, which might mean more layoffs and unemployment.
Economists like to contemplate what came first: the chicken or the egg. But for the business owner who has no time to contemplate downward spirals of doom that necessitate federal bailout packages, a recession means it’s time to get busy.
In fact, it can even be time to make some profit. Though small businesses do not expect to grow during a recession, it is a possibility. As they say: there’s a silver lining in every cloud. And a recession is definitely a cloudy time. Or is it?
Here are 6 helpful tips to make your business more profitable during a recession.
Around 67% of small business owners in the U.S. have a company credit card and 24% of them use this card as their primary method of making business purchases. This has resulted in about $50 billion in business credit card debt, much of which is actually held by the poorest cardholders—illustrating the great irony of credit: those who need it the most, find its terms the most punitive.
While the average consumer credit card has less than 15% APR, the average business credit card APR is approaching 20%. Essentially meaning that every dollar you leave on balance will cost you $0.20 per year.
With numbers like that, it’s obvious that one of the first steps business owners should take is debt consolidation. Or at the very least, restructuring their existing debt. One of the easiest ways to do this, especially with credit card debt, is to use balance transfers.
This involves one bank paying off your balance on a different credit card or several credit cards, so that your debt is transferred—sort of like a home loan refi for credit cards. Often the rate on these balance transfers is a promotional 0% for 12, 18, or 21 months.
Many business owners (and consumers, for that matter) do not realize that they can actually call up their bank or credit card and ask if they have any balance transfer promotions, or if they can put a promotion on their account. Moreover, you can often use balance transfers to pay off other types of loans as well, such as business loans, auto loans, and even personal loans.
Banks will charge a fee to conduct this transfer, but a one-time 3% payment built into the balance sure beats paying $0.20 on every dollar. And if you’ve been getting these offers in the mail, a recession might be just the time to stop throwing them out or crumpling them up and using them as packing material. Interest rates are a significant business expense that can be downsized, making it easier to stay afloat in the churning waters of recessionary seas.
It takes money to make money, as business owners know. Startup costs are no joke. But maintenance costs can be just as challenging. One study examined the largest areas of typical business spending and found that labor took up around 29% of the budget, real estate costs (like rent or lease) around 13%, marketing 7%, and utilities 5%.
The exact ratios of one pie splice to another do vary across industries, as do the increase in costs year after year. For example, while human capital costs decreased 10% in the publishing industry during the pandemic, warehousing and storage labor costs rose 20%, while gambling labor costs rose 24%.
Whether that means consumers were reading less and gambling more may require further analysis, but it does mean that in some cases, periods of crisis can make your labor costs actually go up.
Of course, it can also force your labor costs to go down, if you’re forced to downsize. This is a conversation that nobody likes to have since it involves the emotional human element of people who are depending on your business.
But if you’re reluctant to reduce hours or slash employees, you can still examine all your other contracts. While some of these costs are unavoidable, you can also be overpaying for them.
For example, Forbes recently suggested that many businesses are overpaying their vendors by 10% or more. Other common areas of overpayment include telecom contracts, software subscriptions, insurance, and marketing services.
A recession might be just the impetus you need to sit down and compare the pricing of your current vendors to other vendors, or call up your service providers and ask why you are paying what you’re paying.
This brings us to our next point. Taxes are probably the area of expenses where businesses are overpaying the most. As many as 93% of businesses are overpaying their taxes, in part because they are not claiming all the deductions and tax credits they can claim.
For instance, if your business involves providing services like consulting and working from home, you could be claiming a lot more than then the standard home office deduction. You could use the number of rooms method or area method to take the percentage of your home used for business and multiply it against your total housing costs (mortgage and utilities, for example) to get a bigger tax deduction.
You could be writing off travel expenses as long as your travel is planned for business purposes and at least 50% of the days have some business allocated to them. You could be claiming tax credits if you hire veterans, drive an electric vehicle, or provide child care for your employees.
This is where it pays to work with an accountant. And not just one who prepares consumer tax returns, but one who is familiar with types of businesses and their potential tax strategies. For instance, while you may be claiming depreciation on your business assets already, an accountant can help you explore some cost segregation analysis to accelerate the depreciation of certain assets more quickly (at least on paper).
If good times have turned into lean times, some financial planning like that can go a long way toward increasing your bottom line during a recession and beyond. Remember that when it comes to profit in business, it’s not always about how much money your business makes, but how much money your business keeps.
One way to save money during a recession is to put some things on autopilot. Or even if you are not going to put them on autopilot entirely, it may be time to analyze the efficiency of your workflow and see if there are any things you can change. Given the rapid acceleration in very accessible technology within the last decade, you probably can.
Software like Mailchimp or Constant Contact can help you build nuanced sales funnels that take a lot of the work out of pursuing the right clients or customers. Workflow software like Slack and Monday can streamline communication in your workforce.
And accounting software can break down your spending into pie charts and graphs, which can make it easier to analyze business performance and make life easier—unless you really prefer to engage in spreadsheet baking.
One area of business processes that can be improved on the automation end is payments and invoicing. If you’re still collecting credit cards to swipe through an aged POS terminal that looks like a device from the Star Trek the Original Series, and then reconciling the books at the end of each day by hand, it’s time for you to get automated.
Payment processing companies today like ECS offer much better, more secure, faster payment solutions like mobile payments, contactless payments, and online payment gateways that customers can access from their phones. Moreover, these solutions can be integrated with invoicing and accounting software as well.
According to some estimates, small and medium-sized businesses spend about 120 days per year on bookkeeping or about 5% of their manpower. Unfortunately, if you’re a sole proprietor or a business with a few employees, that’s going to be a much higher percentage. Time is money, and money can be saved during a recession if you can automate some of your business
Learning how to navigate a recession will sometimes require you to think outside the box. Or in the box, as it were. Customer acquisition costs vary widely by industry, but one standard across industries is the ratio of customer acquisition cost (CAC) against lifetime value (LTV), which should be 1:3 or better.
The more you spend on getting new customers, and the more new customers you need to get, the less profit you may have, especially in a high-churn era of consumers distracted and bombarded by constant marketing. Even social media marketing while they scroll on the ‘gram.
But as it turns out, even if your service is not currently in high demand during a recession, customers can be loyal to a business (like yours). Although pricing, promotions, and convenience are driving factors to consumer loyalty, one driving factor is an emotional connection, even according to large corporate giants like software behemoth Oracle.
Customers like to know you care about them. If you don’t believe it, think about how many birthday cards you get from Baskin Robbins or birthday emails you get from Amazon. Pizza Hut is inviting you in for a free pizza (don’t quote us on that one, but invite us if it’s true) while Barnes & Noble is giving you 10% off a book of your choice.
Take a page out of their book and start deepening relationships with your existing customers…and not just on their birthday. This practice can save your business a significant amount of money not only by reducing acquisition costs but by improving the lifetime value of your existing customers.
Deepening customer relationships can look like a number of things depending on the size of your business: a phone call, an email, a personalized direct market response to inquiries on Instagram or Facebook, a positive in-person interaction like lunch, or even a postcard in the mail. It could be coupons, content, hiring a social media manager, or perhaps the rollout of a new rewards program on a custom-built app or a third-party app like Toast.
Remember that in every cloud there is a silver lining. One piece of counter-intuitive recession advice is that a recession may not be the time to downsize, but expand. In fact, a study conducted by PWC found that mergers and acquisitions made during the downturn after the dot-com bust, for instance, saw better returns for shareholders long term.
Additionally, the Harvard Business Review has likewise pointed out that there may be premium deals to be found during uncertain economic times, as assets that companies were formerly reluctant to sell become a source of potential cash. This is good news for businesses that have cash on hand, can get good funding, or have not been as negatively impacted by a recession.
The recession may just be the time to purchase a competitor or purchase the inventory a competitor is unloading as they downsize or go out of business. If you own a small business where a merger is not a relevant topic, don’t throw the baby of this advice out with its proverbial bathwater. Applying the general principle to your scale, a recession might be one of the best times to (as mentioned) find deals on inventory you could not get at any other time.
This might involve something as simple as keeping your eyes open as you drive around town, or browsing a site like eBay or an industry-specific site. Depending on the economic situation in your immediate vicinity, there may be business closures that result in vacancies, prompting desperate landlords to offer terms more favorable to a renter—say for instance, a small business looking to expand to a second location.
Some business owners will have to close their businesses during the recession. Others will downsize. Some will even start a business in a recession. As for you and your business, you can actually use the recession to become a profitable small business.
In summary, one way to do that is to use the recession as a motivator to re-examine your business plan, debts, processes, contracts, and customer relationships. Another way is to use the recession and its related conditions to look for new opportunities you may not have seen before.
Whether your business is a chain of local grocery stores, cleaning services, managing money, investing in the stock market, or you’re a sole proprietor doing home improvement, you can turn the negative effects of a recession around and make these lean times work for you.
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