An estimated FIVE minutes after everyone thought, hey things are looking up again a new scare word popped up all over the place. Like whack-a-mole people wouldn’t shut up about it:
Ugh. How about some breathing space, right?
But if you’re one of those bladesmiths for whom making knives is more than a fun hobby then things just got a bit more worrisome. A recession isn’t something to be trifled with—particularly since custom knives are premium products. And the thing about recessions is: they shift demand from premium to budget products.
So, if knife making for you is a business and you want to take the economic outlook into account when forging and hammering and fulfilling orders, then this blog post is for you.
What is a recession anyway?
If you listen to the news, recession usually is “two consecutive quarters of negative growth in real GDP”. Did you fall asleep while reading that sentence? I suspect that’s why they did it. And that’s not even the official definition in the US.
Unless you’re in the business of predicting the economy, this is a more useful definition:
A recession is a time when the economy keeps getting worse and worse. Demand for products and services drops, so companies and their profits go under. A lot of people lose their jobs, which means they have less money to spend … which means the whole thing gets even worse. And so on.
The key to all this is: demand drops—and it changes.
Middle-class demand gets hammered in recessions
When a recession hits, it’s mostly the middle class that changes how they spend. If you got little money, then a recession makes little difference to your spending pattern: you are already on a lean budget anyway. If you’re very rich, a recession likely is more of an opportunity than a problem. But if you’re middle class?
If before you could comfortably buy the organic produce and go to movies every Saturday then a recession is the time when you become more careful. When you decide to go for the store brands instead of the big names. When you go only every other Saturday to the movies.
When you think: It would be suuuuper cool to own a custom knife … but maybe not now.
And that’s why recessions can be a problem for knife makers. So, what can you do?
3 rules to survive a recession as a small business
Bladesmiths are small businesses and the same rules for recessions apply for you as for any other SME:
- preserve cash
- tighten your cash-related policies
- build up your backlog
Cash is king (in a recession)
If you can’t buy supplies and pay your bills it doesn’t matter how many knives are waiting to be made.
You’ve got to have the cash when you need it.
That means managing cash-flow is the key to get your business through a recession.
Note it doesn’t mean that you have to stay in cash all the time. But you got to take extra care that you can access what you need.
1. Do this NOW: Collect invoices
The more people get worried about a recession, the more they try to keep their cash with them. That means, you keep a good eye on your invoices. Ideally, get ahead of the game and collect now what is due.
If you’re being too lenient, then you’re shifting risk from them to you. Can you afford it? If not, ask for what is rightly yours.
2. Get your personal finances in order
Since your biggest expenses are probably all about your household, it’s important that you get those bits in order.
The gist is: Reduce expenses, get out of high-interest debt, maintain your credit score.
It pays to do this now because the longer you wait, the more expensive things like renegotiating debt gets.
Since this is worth an entire article of itself, I’m just going to link to one that I like. Where it’s coming from is different—reduce the risk about getting fired—but it’s really about preparing your finances for a recession.
Okay, let’s get to knife making.
3. Polish your Order Books
Your order books are the backlog of open knife orders. Preparing for a recession, those you have to have a good look at.
Update your backlog
First, update them. As mentioned, people get worried, so when the time comes to start the order, the customer—super nice and would love a knife—might feel they’ll have to back out.
The problem is that you might have expected this money to come in. But maybe instead of 25 knives in your books you really have only 7. And that makes a whole lot of difference for the money coming in, right?
So, one thing you can do is go through the list, get in touch with customers—very gently, casually—and make sure they’re still on board. Anyone you think might be backing out, treat them in your planning as if they are.
The key is to have honest and reliable information about future cash as much as possible.
Open and fill your books
A related task: open your books and allow orders to come in before people get too worried and demand dries up.
In good times, you might want to have a shorter order book, so that waiting times are not so long. You can afford to do this because you can be sure that orders will flood in once you open your books.
In times of a recession, err on the safe side: lengthen your backlog.
(The other nice thing: anyone on your books is someone who you know might love one of your knives some day. Stay in touch!)
4. Collect deposits & tighten your cancellation policies
One way to handle the problem that two thirds of your backlog evaporate when it’s time to pay is to ask for deposits—and have a clear cancellation policy.
There are a few reasons for this:
- Having a deposit after you start makes sure that you cover parts or all of your costs, even if not your time.
- Once someone already has paid a good chunk of money, they’re committed—and more likely to cough up the rest.
- Having a clear cancellation policy (and sticking to it!) helps you plan your cash flow
All this helps you to not suddenly stand empty-handed or needing to find a few hundred dollars for a refund when you expected to get paid.
5. Mind your invoices—and reduce the time to pay
A recession isn’t the time to allow customer half a year to pay. Have a look at your policies and what you tell folks, and see if you can reasonably shorten the time that you expect cash in the bank.
And then set up a way to keep track of that stuff. Automating reminders helps.
6. Small inventory?
Inventory is one of these things. Usually in a recession you want to go low on inventory—shelling out big chunks of cash for the privilege to have a pile of metal lying around may not be a great way to preserve cash.
The only issue is that currently we’ve got some major geopolitical issues running havoc. If you foresee steel prices going up significantly then you might just want to do that.
7. Look at your expenses: Go cheap
Obviously, you want to reduce your expenses where you can. You know better where you spend and where you can reduce—so sit down, have a look at how much is going out and for what, and see what you can reduce.
8. Postpone investments, build yourself or buy 2nd-hand
Investments. Do you really need to hand Evenheat your money for a brand new heat treat oven right now?
Can you wait, maybe use a service for a while? Or are you able to build one (see our DIY guide for the control box)? Is there an ugly but cheap second-hand one you can buy and refurbish?
Time to get thrifty. Once you have your economic bearings, and a better sense of where demand will be, you can be more trigger happy with investments.
If have business debt, see if you can:
- Pay down any high-interest credit card debt that might get you into trouble later on.
- Renegotiate loans to better terms because the interest rate might be going up for a long time yet.
- Don’t pay down cheap debt just because you got the money—preserve cash. (If you’re up for interest rates readjustments it’s a different story.)
Yes, same ideas as for your household.
When do recessions end?
So, when do recessions usually end?
The important thing to know here is that when economists declare the recession over, it’s not the same as “things are back to normal”. A recession is over when things look up again (instead of tumbling down further). But the economy might have fallen a long time.
I’d say: The recession is over when your order books start filling up faster again than you can fulfill them.