As economic volatility persists, the thought of a potential recession is increasingly top of mind for small and midsize businesses (SMBs). There is no guarantee that a recession will happen anytime soon, but it’s always wise for businesses to plan ahead for any number of scenarios, including an economic downturn.
With the right strategy and capabilities in place, you can spot red flags early, assess your recession risk and take action to shield yourself from the worst effects.
In addition to these steps, CFO Ken R. shares his insights on what he has learned about recession-proof businesses over the years, starting with the concept itself. Ken says that while there is no way to fully recession-proof your business, “what you’re looking to do is minimize your vulnerabilities and maximize your flexibility by focusing on: What do you need to survive dips in revenue? How fast can you adapt?”
The ABCs (and Ds) of Recession Preparation: What the Economy Is Telling SMBs
Several signals so far in 2025 point to the rising probability of recession. U.S. bond markets—long held as a leading indicator of the health of the U.S. economy—remain volatile. Consumer confidence is down. And in April, J.P. Morgan Research raised its probability of a recession occurring in 2025 to 60%. The U.S. even recorded its first quarter of negative GDP since 2022.
And while these economic indicators point to a rising risk of a recession, SMBs should be using the same playbook for recession planning that they would use in times of economic growth: prepare for as many scenarios as you can.
“My approach is the same approach I use in everyday business strategy, and that is to always have a plan A, a plan B, a plan C and a Plan D,” says Ken. “Continue to plan for scaling and growth, but also plan for the bottom falling out.”
Assessing Your Recession Risk: Red Flags To Look For
Before you can plan how to prepare for a recession, you need to start with a thorough risk assessment. Look for these red flags, which suggest you’re not well-positioned for a downturn:
- Consistently tight cash flow: Are your cash reserves thin? Do you dip into them often?
- High customer concentration: Is most of your revenue generated by a small or homogeneous customer segment?
- Rising debt-to equity ratios or longer accounts payable cycles: Are you getting behind on tracking, processing and paying your company’s debts?
- Inventory and accounts receivable “bloat”: How quickly are you selling your inventory? Are payment collections falling behind?
- Compressed or continually lower margins each month: Are increased costs cutting into your profitability?
- Lack of forecasting capabilities: Do you have the ability to forecast your company’s future performance? Is this a regular part of your business process?
In addition to these red flags, look for other areas in your business that could be weighing you down, like excess head count, outdated systems or inefficient processes. “Those are killer in a downturn. You need to have your company be able to be agile and be able to quickly respond,” says Ken.
Once you’ve identified your company’s weak spots, you can begin to implement the processes to address them and protect your business in the long run.
What Recession-Proof Businesses Do Differently
Companies that not only survive but thrive in downturns have several commonalities:
- They have disciplined cost control and forecasting capabilities.
- They have diversified their customer, product and revenue streams.
- They have a strong balance sheet with a quick cash conversion cycle, good cash reserves and lines of credit.
On the other end of the spectrum, businesses that struggle often enter the downturn with thin cash reserves and a lack of forecasting capabilities. Not only are they unable to anticipate critical revenue losses and get ahead of them, they also lack the liquidity needed to act.
Recession Planning Part A: Minimizing Vulnerabilities
To do the things that recession-proof businesses do well, you have to cultivate a deep understanding of your company’s financials.
- Identify and monitor KPIs. Start by monitoring internal and eternal key performance indicators (KPIs). Focus on 10 to 15 KPIs that make sense for your business operations and goals in the near- and long-term. Common KPIs include AR days, margins, cost of goods sold and inventory levels.
- Strengthen liquidity management. Liquidity is the antidote to uncertainty. Ken urges SMBs to embrace what he calls “911 cash forecasting,” which involves identifying how much cash you have and how long it can last. Build a cushion of three to five months of cash reserves and pay close attention to your cash burn rate.
- Improve cash flow management. Focus on managing your working capital and ensuring you have access to it before you need it. Shorten your cash conversion cycle by accelerating receivables and delaying payments until their due date.
- Reduce debt exposure. Shed the dead weight. See how you can lower your fixed costs or reduce high-interest and unproductive debt. “I’ve actually seen credit card debt almost take out a small company,” warns Ken.
- Lock in a line of credit. Lines of credit provide a cushion for tough times and ensure you don’t rely solely on your cash. But it’s important not to wait until your finances are rocky to apply for a line of credit, when lenders are less willing to extend credit to you. “The best time to go get a business line of credit is when your company’s super profitable—banks really want to do business with you,” says Ken.
- Diversify suppliers, customers and revenue. Recession-proof businesses don’t put all their eggs in one basket. Think about expanding into new verticals, finding new use cases and suppliers for your products, and creating new products entirely.
Ken underscores the importance of having diversified revenue streams. “I’ve talked to clients recently … that have lost every single government contract they have,” says Ken. “How do you prepare for that? How do you prepare for losing two out of three of your contracts?”
Recession Planning Part B: Maximizing Flexibility
After identifying and taking steps to minimize your recession risks, add capabilities like business intelligence tools, financial forecasting and flexible budgeting to get the information you need to plan ahead.
Start by building a KPI dashboard to track the KPIs you identified in part A, then add on forecasting and flexible budgeting capabilities.
“I don’t care how large your company is, you need to have budgeting capabilities and financial forecasting capabilities out three and five years, and you have to understand all of your costs and all your revenue streams,” says Ken. “One of the best ways to do that is through forecasting.”
Adopt Forecasting and Scenario Planning To Take Control of Your Numbers
In addition to giving you insight into the future, the process of developing a financial forecast is helpful because it forces SMB leaders to gain a strong understanding of the numbers that drive their business, in part by identifying which of their costs are sensitive and which are fixed versus variable. This underlying data is critical to knowing how different scenarios can impact your bottom line.
In addition to forecasts, SMBs should implement scenario planning, which lets you model “What if?” scenarios, or the ability to test how potential scenarios could impact your business.
Some examples of “What if?” scenarios an SMB should consider include:
- What happens to our cash runway if revenue drops 20%?
- What if geopolitical tensions rise near a key supplier?
- What if we decrease our marketing spend next month?
- What if tariffs increase on our main import countries by 10%?
Use Flexible Budgeting To Stay Agile
Consider adopting flexible budgeting to quickly adapt to changing economic circumstances. Flexible budgeting allows companies to adjust their departments’ budgets as revenues shift throughout the year, making it easier to change course based on new insights from your forecasting or scenario planning or external market forces.
Plan Ahead With a Fractional CFO
Regardless of the probability of recession, now is the time to evaluate your risk exposure and build resilience on your own terms and timelines. But SMBs often lack the internal bandwidth or experience to engage in effective recession planning, let alone create the recession-proofing capabilities outlined above.
Hiring a fractional CFO gets you the strategic financial leadership you need at a fraction of the cost. These part-time or project-based CFOs can help you shore up your cash and plan for a variety of scenarios, with the added benefit of being a flexible, on-demand resource for your team.
You can’t control the economy, but you can control your strategy by following in the footsteps of recession-proof businesses and planning ahead. Tap into the expertise of Paro’s fractional CFOs to help ensure your business is ready for whatever may come.
