How to manage cash and stay out of debt running a business in a recession

Melissa Bradley has helped guide thousands of business founders through challenges.

The founder of 1863 Ventures, and a serial entrepreneur and investor, says if a recession becomes economic reality and customers cut back more due to inflation, it won’t be anything new for minority entrepreneurs.

“They are concerned because of the impact it will have on customers,” Bradley told CNBC Senior Personal Finance Correspondent Sharon Epperson at the virtual Small Business Playbook event on Dec.14. “The reality is Black and brown businesses are used to being locked out of access to capital, and used to having to spend more for things, so they plan.”

With a 98% success rate during Covid among over 3,000 Black and brown entrepreneurs with whom her organization has partnered, Bradley says consistent planning and “always expecting the worst” is in a minority business owner’s DNA. “Nothing is a guarantee,” she said.

The difference now for all business owners is the need to be mindful of what customers can afford going forward. The latest retail sales report showed a much bigger drop than expected, adding to fears that the economy and consumer are rapidly slowing.

“The first thing is plan. Your financial statements tell you a lot,” Bradley said, adding that they tell you about a lot more than just the assets and liabilities. “Be laser-focused on what financials are telling you about customers,” she said.

It’s more important than ever, she says, to understand drivers of growth, and dig into the details from all the business data at your disposal, showing what customers like and don’t like, where they search and shop, and when and how often they come back.

“Keeping customers engaged and happy is the greatest gift you can give yourself this holiday season to make sure revenue keeps coming in,” Bradley said.

She has some advice for business owners on how to stay out of bad debt, make the right investments, and keep sales flowing even through a recession.

Get a handle on costs and prices

Cash is king, “or queen,” Bradley said, depending on the entrepreneur, and it’s the first thing to get a handle on in a tough economy — specifically by looking at costs and prices.

She provided the example of a spirits business that experienced a big increase in the cost of glass that resulted in the need to reevaluate pricing. All businesses need to be able to at least cover costs without dipping into the owner’s pocket to pay, and that’s become more challenging amid inflation.

Don’t dip into personal savings

Bradley stressed that a business owner should not dip into your person savings, or “borrow against your house,” to keep a business going.

“You need to make sure your business can stand on its own,” she said.

Entrepreneurs are sold on a bootstrapping mentality, “a fake it until you make it” mantra, but the reality is it’s a big mistake to bring your personal life down as your business life goes on a rollercoaster.

“Stay really focused on the numbers and know some months are going to be high and some low,” she said.

Rethink contractors and extra cash

If business owners stay on top of their financials and avoid the bad debt decisions, they may be fortunate enough to end up with extra cash. Where that money is invested can make a big difference — either good or bad.

Bradley cautioned that the “world of contractors and 1099s” has been a great thing for the small business community, but during times of uncertainty there is greater risk associated with variable costs that many contractors operate under. Variable costs are harder to predict as part of ongoing cash flow.

She advises moving more costs to the fixed cost bucket, “so you can become laser focused on it, so you don’t have a deficit at the end,” she said.

Scrutinize the use of consultants

New business formation in recent years has been at record levels and when many businesses are first starting out they rely more heavily on consultants. Bradley says now is the time to reevaluate a reliance on multiple consultants. “Every quarter, think about what key operations and processes are needed to keep the business going and how many people are touching them,” she said.

If there are too many people involved, whether internal or external, that’s a risk in and of itself and it is not the sign of an efficient business. All tasks should be centralized and aggregated in the right way, and that might mean having one person on the job rather than three consultants.

Bradley provided marketing as one example, with the tasks of script writing, social media and photography all handled by different people. The smart money move may be to hire one person for all three tasks, but she said owners are often too busy running a company to pay attention to how their money is being invested down to that level.

But being busy is no excuse.

“You can’t make it if you are not paying attention to the steps along the way, how are you spending money so it has a positive ROI over the future,” she said.

Invest a little at a time in yourself

As an investor in many businesses, Bradley sets a cap on what she will put into any entity. “You can’t fund a business forever,” she said. Setting an amount of investment and a duration of investment is part of being disciplined about the funding process.

It is critical to keep personal and business accounts separate, but just as important to know you will at some point need more money for your business and you should be paying yourself as you go — not necessarily a lot, but with consistency.

“Really stay on top of being able to pay yourself a little, and pay off those expenses,” Bradley said.

She said one of the biggest challenges business owners face is waiting too long to pay themselves. “Even if you only have $100, pay yourself $50. This is about building the muscles to sustain and grow the business over time,” she said. “Take $50 and put $25 to a bill and $25 to yourself. It is not about waiting for the big jackpot at the end of the rainbow. … It’s about making steady progress in paying down any personal debt and continuing to invest in the business,” she said.

Make changes in smaller increments

Staying focused on the numbers is likely to result in the need to make changes based on greater understanding of what is and isn’t working. Plenty of businesses have been started during recessions, Bradley said, so change is not a reason to panic.

A business owner shouldn’t be making changes all the time — that is its own form of panic — but changes should be considered in small increments. Each month, each quarter, business owners should be considering changes. And they should not be planning in terms of “next year,” Bradley said.

“What do you want to accomplish between now and the end of the year? In January? … Making changes is not a sign of failure, it’s a sign of keeping pace with customers and what you’re learning from the market,” she said.