When a recession hits, these are the cuts that main street companies need to make

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With the recessionary winds swirling, many small business owners have already cut spending, but more may need to be trimmed to weather the economic storm that is ahead.

US economic growth declined 0.9% in the second quarter, the Bureau of Economic Analysis reported Thursday, marking the second consecutive quarter of negative GDP. That will fuel fears that the economy has entered a recession, although it is not technically an accepted definition for that change in the economic cycle. Fed Chair Jerome Powell said on Wednesday that he does not think the economy is in recession.

Some small businesses are already cutting back, based on signals of a slowdown. A report released Thursday from financial automation platform Disaster found that small business spending on electronics fell 59% between May and June. Many small businesses spent 28% less on shipping, 14% less on advertising and 11% on SaaS and software purchases over the same period, the report found.

“I advise my clients and social media followers to cut back on all unnecessary spending to see what the economy holds in the second half,” said Brian Moran, chief executive of Small Business Edge, which advises small businesses.

Finding ways to cut fat without cutting into company meat is a challenge for many owners. Here are three tips for surviving a recessionary environment.

Self-monitor spending

Owners don’t always know exactly what they’re spending money on, so doing a self-check is the first order of business. Use the last three bank and credit card statements to identify areas where you can make small, but meaningful cuts, says Carissa Reiniger, founder and CEO of Silver Lining, which advises and lends small businesses.

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For example, your company may have subscriptions to magazines, apps, software, or network groups that are unused or underused. These costs can really pile up, especially if you’re paying per head. Also, look at other recurring expenses, including phone services, utilities and bank account charges to see where you can reduce or eliminate certain costs, she said.

“I think the average small business could cut its spending by 20% without feeling a pinch,” said Cleaner. Don’t be afraid to negotiate. Especially in turbulent economic times, small businesses have more bargaining power, she says.

Investigate supply chain costs and inventory levels

David Quinn, chief financial officer of banking fintech Bluevine, said small businesses should also negotiate with suppliers. During these conversations, consider whether you can offer your supplier something different that others don’t. Also think about whether there is a deal you can make that will help both parties, he said. Some suppliers may not be willing to make a deal, but in that case there may be other options to cut costs, such as discounts for bulk purchases, he said.

It can also be a wise move to pay in advance. Peter Shieh, senior wealth advisor at Citi Global Wealth, has a client in the commercial lighting industry who in the past had perhaps six to nine months of inventory, such as lamps and electrical wires. Now the customer orders a maximum of three months in advance. The customer also negotiated with suppliers to fix rates for certain products. “With inflation, prices could be 20% to 30% higher in three months, so that’s something else they’re thinking about and planning,” Shieh said.

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Save money, but be strategic, especially with employees

A cash-saving tactic might be to pay bills closer to the due date, rather than 15 or 20 days in advance, or ask for a longer payment term, say 60 to 90 days instead of 30 days.

Also look at real estate costs, says Matt Armanino, chief executive and managing partner of Armanino LLP, an independent accounting and business consulting firm. If your lease is about to expire, consider whether you really need the footprint you have given the trend towards hybrid or remote working. Or, if it’s a long-term lease, is there an option to sublet some of the space?

For most small businesses, staffing costs are a top cost, so it’s an easy place to try and cut costs. Don’t jump on the gun. The costs of hiring and retaining talent are particularly high right now, so letting people go unless they really have to can be “penny wise and pound foolish,” Armanino said.

If you’ve tried other avenues and still need to curb costs, consider firing employees rather than firing them outright, said Joshua Oberndorf, a CPA at EisnerAmper. Let them know how valuable they are to your business and your intent to bring them back as soon as possible, he said.

You may also want to consider taking out a small business line of credit that you can use as a short-term bridge, Shieh said. For this option, a small business can expect an APR averaging between 7% and 25%, according to TBEN’s Fundera. While rates are higher now than they were six months ago, for example, it’s good to have the lifeline to access if needed, he said. There are also other options for small business financing, including friends and family, online lenders or lenders, and SBA loans.

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Invest for productivity, cost savings and future earnings

See which parts of the company can be automated or digitized. For example, maybe you could deploy a chatbot to reduce customer service costs or move to online versus on-site training. Armanino’s company, for example, did the latter and the move paid off within a few quarters.

Sometimes you need to spend some money up front to realize cost savings in the long run, he said. This is true even in a recession, especially if the money you spend elsewhere can be redeployed for these purposes, he said.

Many small businesses are tempted to stop marketing activities during a recession. Don’t fall into this trap. Consider a study by McGraw-Hill Research that analyzed 600 companies from 1980 to 1985. The results showed that companies that stayed on track with marketing spend during two years of recession significantly boosted sales. And in 1985, those who advertised aggressively during the recession had significantly higher sales than those who dropped advertising.

“You don’t want to cut off communication with customers; that’s your future revenue,” Oberndorf said.