Here's what a 2023 recession could mean for entrepreneurs and how they can prepare
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- If we're heading into a recession, entrepreneurs will have to prepare their businesses now.
- Sales could slump, budgets may tighten, and securing capital could become a lot harder.
- Founders can audit their finances and find creative ways to make sales to combat these challenges.
A recession in 2023 is probable. JPMorgan reported in November that the US economy will likely slow down, despite the Federal Reserve's attempts to tamper inflation.
If these predictions are accurate, entrepreneurs will need to begin preparing their businesses now for the challenges ahead. Sales could slump, budgets could tighten, and securing capital could become a lot harder.
Insider spoke with founders and experts to understand how a recession could affect entrepreneurs' bottom lines and the steps they could take now to prepare.
Challenge: Funding will be harder to come by but not impossible
Widespread tech layoffs and drops in venture-capital investment signal that an era of high-growth, high-spending startups is over, Jack Newton, a cofounder and the CEO of the software company Clio, said. While investors are pulling back and averting risk, the market isn't drying up entirely.
"There's still a lot of dry powder out in the market and a lot of capital for investors to deploy, but it's going to be at a different price," he said, adding that entrepreneurs would need to adjust their expectations from the big venture deals of the past decade.
"Investors are writing checks at multiples that are half or three-quarters less than what they were a year ago," he said.
It's not just venture capital that's affected — as interest rates climb, bank loans become more expensive to acquire.
Ryan Niddel, a serial entrepreneur and growth specialist, said a recession was not an ideal time to be in debt.
"The best time to go after debt is when you don't need it and when it's inexpensive," he said.
Advice: Audit your financial standing and standard operating procedures
Now is the time to audit your books and ensure you have the cash reserves to weather the bad times. Accounting can be an afterthought for new founders, so Niddel recommends hiring a third party to audit your books.
"It's a great way to catch things that you might not know to look at," he said. "There could be small amounts of money leaking out in places you didn't even know to look."
While you're at it, audit your processes too, he added. When a company is in a high-growth stage, it might adopt ad-hoc systems that are fine for the moment but will need to be revamped in slower months to be sustainable and efficient.
"We get mired down in the day-to-day grind that is our business," he said. "All of a sudden, we don't realize that we're doing things that aren't as efficient as they could be because they're familiar."
Challenge: Sales are probably going to dip
Isabel Guzman, the Small Business Administration administrator, told Insider that while inflation had shown signs of cooling, business owners would continue to deal with price adjustments through the new year.
"They have to either adapt their model or figure out the right pricing structure so they can continue to survive during this time," she said.
Inflation and interest rates often indicate how willing people are to spend. Americans are cutting back as their household savings dwindle. Even so, we saw a record $35.4 billion in sales between Thanksgiving and Cyber Monday.
But decreased spending isn't all doom — it also means consumers will be shifting their focus to items they deem essential and highly valuable.
"In times of recession, people certainly don't want to spend as much money," Niddel said. "But what it really comes down to is they need to experience a larger value for the money they do spend."
Advice: Look for new sales avenues and talk to customers
Earlier in the pandemic, small-business owners grew accustomed to adapting to customer needs and environmental restrictions — they learned how to make their services available online and substituted products when supply-chain issues prevailed.
Similarly, Richard Bliss, a finance professor at Babson College, said business owners would need to find new avenues of growth by adapting their products and services "to be more attractive in a recessionary environment."
"Even in a recession, there are market sectors that continue to do well or even, in some cases, do better," he said.
Niddel advises founders to get ahead of a sales plummet by reaching out to their top 20 clients or suppliers as early as possible. Ask them about their immediate concerns and how you can help.
"You might throttle back some of your marketing investments on new client acquisition and double down on how to help the customers that are already familiar with your brand," he said.
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