Preparing for Uncertainty, Part 2
By Rieva Lesonsky
If there’s one thing that’s predictable about entrepreneurship, it’s that it’s unpredictable. In this special 7-part series, we’ll help you prepare for uncertainty, minimize risks and protect your business.
Talking about an economic downturn right now might seem like a move only Debbie Downer would make. After all, retail sales are at record highs, unemployment is at record lows and the U.S. is enjoying the second-longest economic expansion on record.
But what goes up must come down—and as every seasoned small business owner knows, being prepared for an economic downturn is always a smart move. With many economists predicting a recession will hit within the next few years, now is a good time to get ready.
Track Economic Indicators
Keeping an eye on key economic indicators will help you spot warning signs of a recession so you have time to prepare. Here are some key economic indicators to watch.
- Gross Domestic Product(GDP): This measure of the U.S. economy is the best yardstick of its health.
- Consumer Spending: When consumers feel confident in the economy, they spend more freely.
- Consumer Price Index: If prices rise, consumers have less money to spend. On the other hand, if prices for what you sell are dropping, that’s a bad sign for your business.
- Consumer Confidence Survey: Indicates consumers’ economic optimism based on their spending and savings habits.
- Current Employment Statistics: Monthly indicator of employment, hours and earnings.
The Bureau of Economic Analysis publishes monthly tables of the U.S. Economy at a Glance that are very useful.
Track Your Business’s Key Performance Indicators
Just as important as the overall economic picture is your business’s economic performance. The key performance indicators (KPIs) that matter most will differ depending on your industry and your business. However, for most small businesses, these are the ones you want to keep an eye on:
- Cash flow: Do you have enough cash flow to meet your obligations?
- Revenues: How much money is your business bringing in?
- Profit margins: Are your profit margins healthy? Are they growing or shrinking?
- Leverage: Are you using financing wisely to grow your business?
- Customer retention: What share of your business comes from existing customers? If you have a lot of customer turnover, or churn, it’s a warning sign.
- Customer acquisition cost: How much does it cost you to get each new customer?
- Customer lifetime value: How much money can you expect to make from a customer over the span of their relationship with your business?
Prepare for Future Financing Needs
The time to borrow money is when you don’t need it. Even if you think you will never need to tap into it, figure out several options for accessing business capital just in case. Get a business line of credit; obtain some new, low interest business credit cards; and maintain a strong relationship with your business banker. This will put you in a good position to tap into business financing when others may be running dry.
Protect Your Business With Insurance
You can’t insure your business against a recession, but you can shield what you’ve built from the risks that threaten entrepreneurs in any economy. Make sure you have sufficient commercial property insurance, general liability insurance, and business income insurance to protect your business from theft, fire, lawsuits and other unforeseen circumstances. You can get all three coverages by purchasing a Business Owner’s Policy (BOP) from The Hartford.
Depending on your business, you may also need workers’ compensation insurance, commercial auto insurance and other special endorsements. Talking to an insurance agent can help you determine the best type of coverage for your company at the best price.
You can’t prevent an economic downturn—but with the help of The Hartford, you can be prepared for all the twists and turns life throws in your way.
In partnership with The Hartford
Check out! Preparing for Uncertainty, Part 1: Is Your Small Business Prepared for the Next Disaster?