“Recession” is a scary word. This is even more true for small business owners and the self-employed. Small businesses often operate on smaller budgets and have less cushioning than larger companies. This means they can be at greater risk during an economic downturn.
While it is too early to say we’re truly in a recession today, most data shows a downward trend. Small business owners, freelancers, and the self-employed would be wise to prepare now to help prevent issues.
If the possibility of a recession has you feeling anxious, you’re not alone. Fortunately, you can do several concrete things to prepare for the possibility of hard times. From tightening your budget to building stronger client relationships, these tips will help strengthen your business.
Recession or not (and whether you like it or not), tax time is coming. This has much bigger implications for self-employed people than for most.
When “normally” employed folks get a paycheck, their employer usually deducts taxes and pays them to the IRS on the employee’s behalf. However, freelancers and independent contractors usually need to pay their income taxes manually.
The smartest way to do this is to set aside money every time you get paid. It’s all too easy to forget or to spend the money on something more urgent during a crunch. However, this will leave you in a bind come tax season.
The general recommendation for 1099 workers, like freelancers, is to set aside around 25%–35% of your income for taxes. Using this guideline, you can manually calculate your taxes and set that money aside in a separate account. You should also make quarterly estimated tax payments, if possible.
An even better move is to automate the process. You could pay an accountant to handle this—this can quickly get expensive, though. A more affordable alternative would be to use a software solution.
Accounting software for self-employed people (like Found) can handle your invoices for you. It can automatically calculate your estimated taxes from each payment you receive and pay it to the appropriate state or federal agency. You can even track your small business tax deductions from the same app.
Before you can make any significant financial preparations, it’s vital that you have a clear picture of how your business is doing. This should include:
How much money is coming in.
Whether that amount will continue to come in.
How much money is going out.
Opportunities for growth.
To get a thorough picture of your business, you need great software. Spreadsheets are wonderful for some things, but keeping tabs on the financial health of your business is not one of them.
The right small business accounting software makes tracking key numbers across your entire business easy. It also helps analyze those numbers and present the results in easy-to-understand ways. For example, Found provides free expense tracking for small businesses and gives you the tools you need to manage your finances well.
Some ways to develop a very clear and detailed picture of your business might include breaking expenses out by category or tracking the percentage of revenue that comes from each client. These details about your business can inform recession planning, so clarity and accuracy are key.
It can be tempting to try to maximize your reach by spreading your marketing efforts across every channel you can think of. This is rarely a good idea, and many successful businesses end up narrowing their marketing strategy.
Even then, it’s not unusual for some of your marketing channels or strategies to outperform others. An excellent way to improve your overall marketing performance and reduce expenses is to focus only on the top performers.
This is always good advice, especially for freelancers or very small businesses. Time, energy, and funds are often limited, so it makes sense to put them where they’ll also make the most impact. With a recession looming, this idea takes on even more importance.
Comb through your various analytics and look at recent performance across each channel and campaign. The picture becomes clear pretty quickly.
For example, if you post content on LinkedIn and your blog, one of the two probably gets much more engagement. Either reuse the higher-performing content on the other platform or drop it. The same can be done for paid ad campaigns on social media.
When money gets tight, one of the best things you can do is reevaluate your spending. For a small business, that means reviewing expenditures for opportunities to cut back. You started this process when you narrowed down your marketing strategy—now it’s time to do it with the rest of your business expenses.
Areas to look at include payroll, office supplies, and software subscriptions. With software, in particular, it might be possible to replace premium subscription services with cheap or free alternatives:
Replace a pricey accounting or invoicing software with a feature-packed alternative (like Found).
Move your funds to a small business bank account with no fees.
Downgrade to the free plan of a project management tool like Trello or Notion.
It’s important to note that this budget advice also applies to your personal life. If you get your personal finances in order, you may be better able to weather a slump in business performance. This is especially true for freelancers or solopreneurs, where your personal and business finances may be more closely tied.
After you work on your operating expenses and budget, zoom out and consider your wider cash flow. Make sure that there are no kinks in the hose and that everything is moving as it should:
Ensure that outstanding invoices are paid and the money is in transit. The larger a recession looms, the more important this is—in case some of the companies that owe you money may not be able to pay it in the future.
Ensure that you’ve paid any invoices that you owe to others. This is good business in general, but it also helps ensure that your books are up-to-date.
Work with your vendors to make sure that terms are agreeable for everyone during financially tough times. This might mean negotiating a different payment schedule or discussing the price of your service package.
These activities aim to ensure that your accounts and forecasts are reliable. This can go a long way toward reducing anxiety around economic downturns.
During a recession, flexibility can be the critical factor in keeping your business profitable. This flexibility can take a number of different forms. Here are a few ideas:
Spread out your client base. It’s always dangerous to have all your eggs in one basket, but the risk is even greater during uncertain times. A good rule of thumb is that no more than 25% of your revenue should come from a single client. This gives you a buffer and prevents a frantic scramble to make up for the lost income.
Diversify your product or service offerings. Consider adding a few new offerings that could either supplement your current selection or open up your business to new clients and customers. For example, if you’re a freelance writer that primarily does website copy, you could add case studies or blog posts to your offerings.
Break into a new market. This is easier said than done and is best tackled before a recession hits. However, sometimes a business is positioned such that a slight pivot could open up a whole new market of potential customers, which adds a level of security.
In general, it’s best to lay the groundwork for these changes while business is good. This prevents a mad dash to make up lost revenue during a downturn. Don’t be discouraged—these efforts can still be tackled even during tough times.
In the previous section, we touched on the importance of not putting all your eggs in one basket. To that end, we highly suggest working to diversify your revenue streams. This can help build extra income and add a buffer by ensuring that if you lose one stream, you still have money coming in.
For freelancers and service-based business owners, this could take the form of products that you sell alongside your services. For example, a freelance designer might sell some icons or design template packs that customers can use on their websites. This helps generate passive income and funnel potential clients toward your hands-on design services.
Affiliate marketing is another common strategy for adding passive income. A massive number of companies have affiliate programs these days. These programs provide everything you need to market the company’s products and get paid. Simply look at the services you use every day and reach out to see if they offer an affiliate program.
In a recession, finding new clients can be difficult. Ideally, you want to enter the recession with a strong existing customer base. To get there, strengthen your relationships with current customers and clients.
The best way to cement your client base is to do outstanding work for them. Beyond that, there are a few things you can do to build relationships:
Holiday gifts. A small gift around the holidays—even a simple card—can go a long way. If you don’t share any holidays with the client, try sending something on the anniversary of your first project together.
Regular check-ins. Reach out to your clients (past and present) periodically. See how they’re doing and how your work has performed for them since your last check-in, and ask if they need help with anything. Hint for freelancers: this is also a good time to slide in a referral request.
Buy them lunch. If the client is local, take them out face-to-face, preferably with their phones off. If not, you can always have something delivered.
Of course, the specifics depend on the nature of the client and the type of work you do. However, the principles are universal. When it comes to building lasting client relationships, it’s truly the little things that count. These small, personal gestures are so rare in today’s world—when they do happen, people remember.
If you think you may want or need financing in the future and a recession is looming, try to secure it now, rather than waiting. Loans, credit cards, lines of credit, and even personal investments tend to be harder to get during tough financial times.
This is especially true if you think you may need extra capital to get through the recession. You don’t want to find yourself scrambling to secure funds and be unable to do so.
One good option to consider is a line of credit from the Small Business Administration (SBA). This agency is generally known for its loans, but it also offers four different lines of credit to small businesses, called CAPLines. These could be useful to get through a rough patch.
Recessions are scary and stressful. However, it’s absolutely possible for freelancers and the self-employed to weather a financial crisis—and maybe come out stronger than ever. Implementing these nine tips today can help you to help build a recession-proof small business.
If you need a little help preparing, check out Found. Our accounting tools for small businesses can help you save money and streamline your finances so that you can focus on the future.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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