A Recession Playbook for a Small Shop

Purpose

A downturn does not announce itself, and the decisions that decide whether a shop comes out the other side get made before anyone is sure one has started. Without a standing procedure the sequence goes: months of hoping, then a panic week in which the shop cuts advertising, stops training, discounts its rate and lays off the two techs it will need first on the recovery. Every one of those is hard to reverse and taken in the wrong order. This procedure fixes the order and states the triggers.

Scope

Covers a broad demand contraction the shop cannot influence: a recession, a regional downturn, a credit tightening. The before stage runs annually whether or not anything is happening; later stages run on their own triggers. It does not cover a seasonal slow period, which is predictable and pre-fundable and which the slow-season cards own; a decline caused by something inside the shop, which the you-or-the-market diagnostic settles first because the responses are opposite; or a local shock with one identifiable cause, such as a large employer closing.

Roles and responsibilities

Stage 1, before: run annually whether or not anything is happening

Step 1. Measure and record the deferrable share. Classify the trailing twelve months of completed jobs into deferrable and non-deferrable tiers, per the deferrable-work card, computing share of revenue and share of job count separately. Acceptance: two percentages with the date, the completed-job count and the mapping used. Wrong: a share computed on one quarter, or computed on job count and quoted as revenue. Stop rule: under 100 completed jobs, extend the window and note it. Hazard: none; a desk calculation.

Step 2. Set both liquidity positions in weeks of fixed operating cost. Compute weekly fixed cost - everything that bills whether or not a truck moves - then measure reserve and credit facility against it, applying for the facility on the last strong trailing twelve months rather than the current one. Acceptance: reserve at or above the 12-week target, held outside the operating account, with 6 weeks as the hard floor; facility signed, undrawn, at least 8 weeks of fixed cost, drawn and repaid once a year so it is live rather than notional. Wrong: a reserve stated in weeks of revenue, which flatters the position because revenue falls in a downturn and fixed cost does not. Stop rule: below the floor, no discretionary capital spend until it is back above; and terms carrying a guarantee or covenant you cannot model against a 20 percent revenue decline are not signed until your accountant has seen them. Hazard: none; a desk calculation.

Step 3. Tag every recurring cost line by reversibility. Work the fixed-cost schedule line by line: immediate (stoppable within 30 days, no penalty), term (a contract with a stated end and notice period), or structural (lease, loan, licence, insurance). Acceptance: one tag per line, every term line carrying its end date and notice period, and the three shares summing to 100 percent of fixed cost. Wrong: a term tag with no date, which is an immediate tag in disguise and gets treated as one under pressure. Stop rule: a line nobody can explain is tagged structural and flagged for the accountant, not guessed. Hazard: none; a desk task.

Stage 2, at onset: run the test monthly, act when it fires

Step 4. Run the onset test on your own numbers, not the news. Three indicators, each against the same month a year earlier so seasonality does not decide it: quote volume, the deferrable share of booked revenue against its own trailing twelve-month average, and receivables over 60 days as a share of total receivables. Acceptance: onset is declared when any two breach - quote volume down over 15 percent, deferrable share down over 8 points, over-60 aging up over 5 points - in the same month, in two consecutive months. Wrong: declaring on one bad month, or on a headline. Stop rule: one indicator breaching three months running is not onset, but it does trigger the you-or-the-market diagnostic, because a lone indicator is more often a shop problem. Hazard: none; a desk test.

Step 5. Freeze additions, name what is protected, tighten terms. Within 5 business days of onset: a written freeze on new hires, new recurring subscriptions, discretionary capital and any commitment past 12 months; in the same document, the protected lines that may not be cut, being lead generation, training and anything safety-related; and revised deposit terms on new work, with aging reviewed weekly. Acceptance: one dated page, both lists explicit, read by everyone who can commit money, and within 10 business days no new work starting for an account over 60 days without a paid deposit. Wrong: an across-the-board percentage cut, which takes the same slice out of lead generation as out of office supplies. Stop rule: an account breaching terms twice goes to prepay or stops, and that call is the owner's. Hazard: none; office work.

Stage 3, during and out: cut in order, hold price, watch for the turn

Step 6. Cut from the immediate tag first, and never from the safety list. Work the step 3 schedule in order: every immediate line is considered before any term line, and no structural commitment breaks without written advice. Acceptance: each cut recorded with its tag, its effect as a percentage of fixed cost, and how long restoring it would take. Wrong: breaking a lease early because it is the biggest number on the page. Stop rule: immediate tier exhausted with the gap still open means stop cutting and go to the facility, then the reserve, rather than into the term tier. Hazard: this is where fleet and safety spend gets cut, and that kills people rather than costing money. Strike these before you start: brake, tyre and annual vehicle inspection intervals; calibration and bump-testing of gas-detection instruments on the manufacturer's schedule; replacement of fall-protection harnesses and lanyards at their stated retirement date or after any fall arrest; and PPE stock. A deferred calibration is an instrument that reads clean in an atmosphere that is not.

Step 7. Hold the published price and move the mix instead. Rates and the price book do not change in response to soft demand, and within 30 days of onset dispatch and promotion weight toward the non-deferrable and maintenance tiers rather than the replacement tier that fell. Acceptance: published rates unchanged for the period, every concession traceable on the document as a named scope or terms change rather than a lower number, and scheduled hours moving toward the tiers that held within one month. Wrong: a quiet discount, which is invisible in reporting, permanent with that customer, and repriced against you by everyone they talk to. Stop rule: losing over half of quotes at unchanged rates to a competitor of comparable quality is a positioning problem, not a signal to cut the rate. Hazard: shifting the mix moves technicians onto work they may not have done recently, so before any reassignment the service manager records current qualification for it - licence or certification class, refrigerant or fuel-gas handling credentials, and any manufacturer training the warranty depends on.

Step 8. Work the opportunity list, and declare the exit on the same test that declared onset. A downturn genuinely opens up hiring, used equipment and small acquisitions, so keep a standing list and review it monthly alongside the step 4 indicators. Acceptance: any purchase paid from cash above the 6-week floor and, while the reserve is below the 12-week target, only where payback is demonstrable inside 12 months on work that is still moving; exit declared when two of the three indicators reverse in the same month, in two consecutive months, after which the freeze lifts in reverse order of application - protected spend, hiring, recurring commitments, capital. Wrong: buying a good deal on capacity that serves the tier that just collapsed, or staying defensive a year past the turn and handing the recovery to whoever hired first. Stop rule: below the floor, no discretionary purchase at all, and the capital freeze holds even once the indicators reverse. Hiring is judged separately, being a variable cost paid from billable work rather than a commitment. Hazard: none; desk decisions.

The record this produces

One dated page per cycle, kept with the year-end file: the deferrable shares and their job count; reserve and facility in weeks of fixed cost at each measurement; the tagged cost schedule with each tag's share; every indicator reading with its threshold beside it; the onset and exit dates; every cut with its tag and restore time; every opportunity decision with the reserve level behind it. The owner reads it next cycle, and so does the banker, because "we cut 7 percent of fixed cost in the order our written procedure specifies, and here is the schedule" is a different conversation from a verbal one.

When the site does not match the procedure

No reserve and no way to fund one this cycle: half of step 2 fails permanently, the facility carries stage 1 alone, step 8's purchases are void, and step 6's stop rule loses its fallback, so the immediate-tier cuts come earlier and deeper. Onset fires while a growth plan is running: growth consumes cash before it produces it, so suspend the plan and re-measure the reserve first, because a figure taken under one is stale. The decline turns out to be traceable to one customer or employer: stop and work that, per the Scope note above.

Worked pass: one cycle at a nine-person shop

Week 0. Step 1: 418 completed jobs in the trailing twelve months, deferrable share 61 percent of revenue and 44 percent of job count. Passes. Step 3: 31 recurring lines tagged, 18 immediate, 9 term, 4 structural, at 22, 34 and 44 percent of fixed cost, summing to 100. Passes.

Step 2 fails on its reserve half. The balance divided by weekly fixed cost gives 4.1 weeks, under the 6-week floor, so the stop rule fires and the second van approved for spring is cancelled. The gap to the floor is 6.0 minus 4.1, or 1.9 weeks; at a retention rate of one week of fixed cost every ten weeks that is 19 weeks before discretionary capital is authorised again. The gap to the 12-week target is 7.9 weeks, about 79 weeks at that rate, which is why this step sits in the before stage. The facility half passes, renewed at 8 weeks of fixed cost and undrawn.

Months 4 and 5. Month 4: quote volume down 19 percent year over year (threshold 15, breached), deferrable share of booked revenue 51 percent against its 61 percent trailing average, down 10 points (threshold 8, breached), over-60 aging up 3 points (threshold 5, not breached). Month 5 repeats the same two: quotes down 22 percent, deferrable share down 12 points, aging up 4 points and still inside its threshold. Onset is declared in week 18, reserve at 4.1 plus 1.8, or 5.9 weeks, still under the floor.

Week 20. Step 6 runs. Two of the 18 immediate lines come off the eligible list under the hazard clause: annual calibration of the two gas-detection instruments, and the fleet brake and tyre inspection interval. Of the remaining 16, nine are cut, worth 7 points of fixed cost, so fixed cost falls 7 percent. The reserve has accrued to 6.1 weeks of the old fixed cost; against the new figure that is 6.1 divided by 0.93, or 6.6 weeks. It clears the floor with no new cash - the denominator moved, not the balance.

Week 26. A competitor sheds two technicians and offers a used machine. The reserve is 7.2 weeks of the new fixed cost: above the floor, below the target, so step 8's middle condition applies. The machine serves replacement work, the tier that fell, so payback inside 12 months cannot be demonstrated and it is declined. One technician is hired, which step 8 judges separately.

References

• U.S. Small Business Administration, small business cash flow and contingency planning guidance
• Federal Reserve, Small Business Credit Survey, on credit tightening during contractions
• See related: Deferrable Versus Non-Deferrable Work and What a Downturn Touches; Is This Slowdown You or the Market; The Cash Reserve a Service Business Should Protect; Building the Bank Relationship Before You Need the Money; AR Aging Collections Cadence