One of the main challenges business owners may face later in 2024 is the possibility of a looming recession. If the thought of this has kept you up at night, you’re not alone.  As St. Louis financial advisors who specialize in working with small business owners, this is a topic that we discuss regularly with our clients.  

It’s a valid concern. When inflation and high-interest rates impact your profitability, there can be negative consequences for your business and retirement plans. Thankfully, there are proactive steps you can take to safeguard your hard-earned savings against significant market downturns.

In this blog, we’ll offer insights into what a recession could mean and how to position your business to survive and thrive despite these challenging conditions.

Understanding the Impact of a Recession

A recession typically results in reduced consumer spending, tighter credit conditions, and an overall slowdown in economic activity. 

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Here are a few ways a recession could impact your business:

• One of the most immediate effects of a recession is a decline in sales and revenue. Consumers and businesses often tighten their belts and reduce spending. This is especially true if your company offers non-essential goods and services. 

• Maintaining a healthy cash flow can become challenging if your revenue is reduced and your costs stay the same. Paying rent, salaries, suppliers, and other operating costs can become increasingly challenging, emphasizing the need for careful financial planning and prudent management.

• Access to credit is often more restricted during a recession. Banks and financial institutions often become more cautious, tightening their lending criteria. This can make it harder for your business to secure loans that will help you cover operating costs.

Financial Strategies to Overcome Adversity

While there are undoubtedly financial risks associated with a recession, there are financial tactics you can use to cushion the impact on your business:

• Review and reduce any non-essential expenses as a way to improve your financial staying power. This could include renegotiating contracts, optimizing operations, or reducing any discretionary spending that can be deferred.

• Explore adding complementary products/services to reduce dependency on one or a few revenue sources.

• Increase your engagement and services for existing customers and increase your efforts to attract new ones. This strategy works best if you are a low-cost leader.

• Consider establishing new lines of credit or explore alternative financing options before you need them to sustain your business. 

• Explore investing in new technology or processes that increase efficiency or create new revenue streams, positioning the business for further growth when economic conditions improve.

The Role of a Comprehensive Financial Plan

As local financial planners in St. Louis, we assist small business owners with succession and transition planning into personal retirement.  

Here are some considerations for selling your business before or during a recession:

First, assess how well your business will fare in a recession. Many factors will play into this assessment, such as the industry you serve and whether your goods/services are considered essential or non-essential.  

For example, say you own a successful travel agency.  It’s possible that during a recession, many individuals opt to postpone travel until the economy is doing better, so the timing of when you sell your business may need to adjust some.

Financial planning should be interactive and ongoing vs. a one-time, static exercise, particularly for small business owners. For small business owners, agility is critical to survival and growth. This approach allows for proactive management of cash flows, investment strategies, and risk assessment, ensuring the business remains aligned with its short-term needs and long-term objectives.

This is why it’s so crucial to continuously engage with a St. Louis financial planning team so you can make real-time adjustments and adaptations to new opportunities or challenges as they arise.

Additionally, your goals and personal circumstances as a business owner can change over time. Regular review and adjustment of financial plans accommodate life events such as family changes, retirement planning, and changes in business ownership or structure, ensuring that the financial strategies remain relevant.

Why Asset Diversification Matters

Imagine you’re a chef running a popular restaurant. Much like your investment portfolio, your menu thrives on various menu items to cater to different tastes. 

Suppose a food shortage hits, affecting certain ingredients more than others. If your menu relies heavily on those scarce ingredients, your restaurant’s success is at risk. But, if you’ve diversified your menu with dishes that use various ingredients, you can continue serving your customer’s unaffected dishes. 

As a business owner, you should consider how your invested assets are diversified, especially during a recession. Just as a chef uses different ingredients to keep the kitchen running smoothly, spreading your investments across various asset classes (stocks, bonds, real estate, etc.) can help protect your business’s financial health when specific markets, industries, and companies are hit harder than others. Using more conservative tactical managers may also be a benefit as they can provide better downside protection in challenging economic environments.

It’s about having options and not putting all your eggs in one basket, enhancing the resilience of your business during economic downturns.

Choosing Logic Over Emotion

Our emotional biases often cloud our financial decisions, especially if the economic environment is volatile. Here’s how you can avoid making mistakes that can have lasting impact on your business:

• Avoid knee-jerk reactions. Recognizing that fear can lead to hasty decisions helps you stay composed and stick to your business plan during downturns.

• Think for yourself. Following the herd is easy, but independent, disciplined thinking helps avoid frequent pitfalls.

• Keep the long view. Despite short-term market fluctuations, history shows markets will rebound. Staying focused on long-term goals means you are ready when the business cycle rebounds.

• Set clear investment goals and develop strategies to reach them. This approach keeps you focused on disciplined decisions, reducing your risk of emotional decision-making.

Be mindful of financial biases that might trip you up:

• Overconfidence, based on biases, might make you overrate your decision-making skills, potentially leading to risky bets.

• Loss aversion means you might cling to losing investments, hoping for a turnaround, possibly missing better opportunities.

• Confirmation bias leads you to favor information supporting your beliefs, which can narrow your perspective and impact diversification.

How Can Trinity Wealth Advisors Help

Our independence means we have no hidden agendas and are not beholden to any parent company that requires us to sell financial products we wouldn’t invest in for ourselves. We believe you should have best-in-class choices regarding the investment of your assets.  

As financial fiduciaries, we will put your interests first. We believe in transparency, so you have the facts when you hire us to advise you.

Your financial plan and investment strategy will be as unique as you are, matching your financial comfort zone and goals, and ready to adapt to change for the unexpected. There is no one-size-fits-all solution for all our clients. It’s just the opposite. Each of our clients deserves a personalized solution.

If you’re ready to learn more about financial planning services for business owners, connect with us for an introductory call.