An economic downturn can impact businesses of all shapes and sizes, but it is often more difficult for entrepreneurs or small businesses to survive periods of economic instability. Furthermore, economic downturns can have a significant impact on an entrepreneur’s personal finances as well as their business.
Millennials and members of Generation Z may particularly suffer from such difficulties, as they have experienced many significant economic downturns during their young lives and now commonly participate in the gig economy. Luckily, entrepreneurs can take many different steps to protect their businesses and personal finances during times of economic uncertainty.
Develop a Crisis Management Plan
Proactively developing a crisis management plan can help small business owners avoid crucial mistakes during uncertain times. The specifics of your crisis management plan will depend on your unique business and priorities. However, you can start the process by asking yourself some essential questions, such as:
- What are the greatest risks facing the business?
- Who will be part of the designated response team?
- What immediate steps can be taken in response to a crisis?
- What impacts could a crisis have?
- Who will be affected by a crisis?
- What resources are available to prevent and respond to crises?
A crisis emergency fund should also include other details that may help your business recover, such as consistently taking preventative measures that may help your business in the future. The best example of this is to set aside assets every month for an emergency fund.
Create an Emergency Fund
Entrepreneurs can help minimize the potential impact of unexpected crises and offset the cost of recovery by creating an emergency fund. Typically, a business’s emergency fund should be large enough to cover three to six months of expenses.
However, when determining how much you will need to set aside, you should consider what type of risks you are preparing for and how costly they may be. You may also need to reassess how substantial your emergency fund should be over time, as your business’s needs and risks may change.
Pay Off Existing Debt
By ensuring that you have paid off all of your existing debts, you can protect your credit score and reduce the strain of expenses during times of financial hardship. Additionally, by eliminating your debts and protecting your credit score, you can more easily qualify for credit cards and loans in the future.
Helpful tactics that entrepreneurs can use to pay down their debt more efficiently include tracking repayment progress, consolidating multiple debts, and designating an accountability partner to help them stay motivated and on track. It may also be helpful to enlist the help of a financial advisor to make an actionable plan for debt repayment.
Separate Your Assets
It is vital to keep your business and personal assets separate to minimize the impact of business losses on your personal finances. One of the most important ways that you can do this is by opening a business checking account and not using any personal rewards credit cards for business expenses.
You should keep a record of any personal items that are used for business purposes so that you can reimburse yourself appropriately. Furthermore, entrepreneurs should keep detailed records of all business expenses.
Reduce Accumulated Inventory
Entrepreneurs can save their businesses money during tough times by reducing their accumulated inventory. By reducing your accumulated inventory you can reduce costs related to keeping and managing unused inventory. You can utilize many different strategies to reduce bloated inventory, including:
- Marking down inventory that is not selling well
- Repurposing inventory
- Trading inventory with business partners
- Returning items for credit
- Auctioning off items
This strategy can be especially beneficial during times when you are making significant changes in your business that may affect your inventory.
Diversify Your Income Streams
Small businesses and entrepreneurs can better prepare themselves for economic crises by diversifying their income streams, which can provide additional revenue if one income stream is suffering. You can diversify your income streams in many different ways, including:
- Introducing online sales
- Adding a subscription service
- Developing new products or services
- Engaging in gig work
- Investing
In addition, you should ensure that each revenue stream is robust and protected from risk.
Get Insurance
Small business insurance can help protect entrepreneurs from a variety of unexpected events, including financial losses. There are six common types of business insurance, and it is important to weigh each type against your unique needs to find the best policy or policies for your business. The six common types of business insurance are:
- General liability insurance
- Product liability insurance
- Professional liability insurance
- Commercial property insurance
- Home-based business insurance
- Business owner’s policy
When considering insurance, you should also factor in insurance premiums along with personal financial protections when setting your budget.
Establish a Retirement Fund
One such personal financial protection you should budget for is continually contributing to a retirement fund. Preparation for retirement is important in any case, but it can also be a valuable way to protect your personal finances from the threat of an economic downturn.
That being said, it’s important to invest in retirement funds that are less susceptible to loss during market crashes. For example, don’t invest in stocks for your retirement fund which is riskier than other more stable investments.
To choose the ideal retirement plan for you, you will need to consider factors such as your typical income. Additionally, if you are above the age of 50, you should take advantage of opportunities for catch-up contributions.
It is important to develop a sound plan that covers various possible outcomes in an uncertain environment—both for your business and for yourself. With proper perspective and proper strategies in place, the challenges of uncertainty can be turned into opportunities for efficiency and long-term growth.
Jim Holborow is a researcher, writer, and editor specializing in SaaS and financial services. As a contributor to the Credit One Bank knowledge base, Jim combines his communications expertise with a knack for managing credit to create informative, engaging content for readers. He holds a BS in Marketing from the University of Nevada-Reno, with continuing studies in marketing analytics.
