Build three scenarios, not one forecast
Model a base case, a mild downturn, and a severe downturn. The goal is to know in advance which costs you would cut and when.
Take your current monthly revenue and costs, then model what happens if sales fall by 10 percent, 20 percent, and 30 percent. For each, calculate cash left after fixed costs and debt payments.
| Scenario | Monthly sales | Gross profit at 40% | Fixed costs | Monthly result |
|---|---|---|---|---|
| Base | $100,000 | $40,000 | $32,000 | +$8,000 |
| Mild (-15%) | $85,000 | $34,000 | $32,000 | +$2,000 |
| Severe (-30%) | $70,000 | $28,000 | $32,000 | -$4,000 |
In this example, the business stays positive through a mild decline and needs a plan, or a reserve, in the severe case. Use the break-even formula to find your own line.
Set a cash reserve target and build it on a schedule
Many owners aim for one to three months of fixed costs in reserve. Pick a number that fits your volatility and fund it with a fixed monthly transfer.
Fixed costs include rent, payroll you will not cut, insurance, loan payments, and software. Add them up, and multiply by the months of cover you want. A business with uneven sales needs more cover than one with recurring contracts.
Fund the reserve automatically each month into a separate account. Even small transfers add up, and a rule you do not have to remember is the one you keep. See cash flow management for tracking methods.
Example: a shop with $25,000 of monthly fixed costs that targets two months of cover needs $50,000 set aside. Transferring $2,500 a month reaches that in 20 months. It is slow, but a reserve of even one-third of the target still buys time to act before a crisis. Illustrative numbers; use your own.
Make your cost structure more flexible
Convert fixed costs to variable where you can, so expenses shrink when revenue does.
Review each major cost and ask whether it could flex.
- Lease terms: shorter terms or the ability to sublease space.
- Staffing: cross-train, use part-time or seasonal help, and avoid long commitments you cannot reverse.
- Suppliers: terms that scale with volume rather than minimum orders.
- Subscriptions and software: annual plans you can cancel at renewal.
Do this when you are healthy. Negotiation is easier when you are not asking from a crisis. Decide ahead of time which cuts you would make at each stage, and write the list down.
Protect revenue by keeping the customers you have
Retention is cheaper than acquisition, and it matters more when new buyers hesitate. Focus on service, communication, and repeat business.
Contact your best customers regularly, and find out what is changing in their own budgets. Offer maintenance plans, subscriptions, or prepaid packages that give you steady revenue and give them predictable costs.
Watch concentration. If a few customers make up most of your sales, a downturn at one of them is a threat to you. Broaden your base before you need to. The guide to recession-resistant businesses explains which business traits tend to hold up.
Keep communication honest. If you must raise prices because your own costs rose, explain why and give notice. Customers usually accept a clear, modest change better than a surprise one.
Tighten receivables and inventory
Slow-paying customers and excess stock tie up cash. Both get worse in a downturn, so tighten early.
Shorten payment terms where your market allows it, invoice promptly, and follow up on day one past due. Consider deposits for large jobs.
For inventory, track turnover and stop reordering slow movers. Cash sitting on a shelf cannot pay payroll. Try to buy in smaller, more frequent quantities for items with uncertain demand, if suppliers allow.
Line up credit while your numbers are strong
Credit is easiest to arrange when sales and bank balances look healthy. Waiting until revenue falls limits your options.
Funders review recent revenue and bank statements. After a decline, those documents work against you. If you think you may need flexibility, explore options now and decide later whether to use them.
A business line of credit lets you draw only if needed and repay as cash returns, so you pay for what you use. For a planned investment, a term loan has fixed payments that you can budget against your scenarios.
Use the payment stress test before you accept any offer, so you know what happens to the payment-to-revenue ratio if sales slip. ROI Funder looks at 500+ FICO, 6+ months in business, and $20,000+ monthly revenue, and the application is a soft pull with no obligation.
Keep investing where the payback is clear
A downturn does not mean stopping all spending. Projects with fast, measurable returns can still make sense.
Cutting everything can leave you weaker when demand returns. Keep spending that improves efficiency, lowers costs, or protects your best customers, and test it with payback math: cost, expected added profit, and months to recover. If a project cannot pay back inside your severe scenario, postpone it.
Frequently asked questions
When should I start planning for a recession?
Now. Scenario planning, building a reserve, and arranging credit all work better when your sales and bank statements are strong.
How much cash reserve do I need?
A common target is one to three months of fixed costs. Businesses with uneven or seasonal sales usually need more.
Should I take on debt before a recession?
Only for projects with clear payback or as unused credit capacity. Avoid fixed payments you could not carry in your severe scenario.
Which businesses hold up best in a downturn?
Those with recurring revenue, essential services, low fixed costs, and a diverse customer base tend to be more resilient, though no business is immune.