Throughout history, there have been times when the economy has gotten so bad that we dipped into a recession. A recession isn’t as bad as a depression. Even younger generations will have heard of The Great Depression, thanks in part to shows like The Waltons, and stories passed down from grandparents. A recession isn’t considered as bad as a depression, but it can be bad enough that people can lose their savings, their homes and even their dignity. History repeats itself and we’re bound to have a recession sooner or later. What can you do to prepare for it?
What Is a Recession, and Why Does It Matter?
A recession is generally defined as a significant decline in economic activity across the economy, lasting more than a few months. It often brings slower business sales, fewer job opportunities, declining consumer confidence and reduced spending. For individuals and small businesses, these shifts can mean tighter cash flow, reduced income, and more financial stress.
While recessions can vary in cause and severity, their effects are usually felt widely. That’s why having a plan in place—before the downturn hits—is so important.
Start by Reviewing Your Financial Position
Preparation begins with clarity. For individuals, that means reviewing income, expenses, savings and debt. For small business owners, it means looking at financial statements, including cash flow, profit margins, and upcoming obligations.
If you work with a CPA, now’s a good time to schedule a financial review. This gives you a chance to identify vulnerabilities—such as low cash reserves, high-interest debt, or inconsistent income—and take steps to strengthen your financial position.
For businesses, evaluating your receivables, payables, and inventory can help you understand how quickly you could respond if demand slows or costs rise. For households, identifying discretionary versus essential spending provides a clear path for making short-term adjustments if needed.
Build and Maintain a Cash Cushion
One of the most important steps in recession planning is building a cash reserve. Cash gives you options. For individuals, this might mean saving three to six months’ worth of living expenses. For small businesses, a reserve that covers at least two to three months of fixed costs can offer valuable breathing room during lean periods.
If saving a full cushion all at once isn’t realistic, start small. Set up automatic transfers to a separate savings account. Trim a few non-essential expenses and redirect the money toward savings. A CPA can help identify areas in your personal or business budget where small changes can free up funds for your reserve.
Manage Debt Strategically
During uncertain times, carrying high levels of debt can become a liability. If you have loans with variable interest rates or high monthly payments, explore whether refinancing or restructuring is possible. Reducing monthly obligations or locking in lower rates while conditions are favorable can offer peace of mind if income becomes less predictable.
For business owners, this might mean negotiating more flexible terms with lenders or consolidating loans. Individuals can look at options for paying down high-interest debt or switching to fixed-rate terms. A CPA can guide you through the pros and cons of different strategies based on your goals and risk tolerance.
Control What You Can: Expenses and Budgeting
Recessions often bring a level of uncertainty that’s outside your control—but how you manage your budget is within your power. Reviewing your expenses now, before a downturn hits, allows you to make thoughtful decisions instead of reactive ones.
In a household, this may mean pausing non-essential subscriptions, dining out less, or putting off major purchases. For a business, it might mean delaying upgrades, renegotiating vendor contracts, or reducing discretionary spending such as travel or marketing.
Working with your CPA to create a more flexible budget can help you respond quickly if your income dips. Knowing where your money goes—and where you can cut back temporarily—can reduce stress and help you maintain stability.
Diversify Income Where Possible
One of the challenges during a recession is the potential loss or reduction of income. If possible, consider ways to diversify income sources. For individuals, this might include freelance work, a part-time job, or turning a hobby into a side business. For small businesses, it could mean expanding into new markets, offering additional services, or identifying recession-resistant customer segments.
While not every income diversification idea will work for every situation, a CPA can help evaluate the financial feasibility of different options and offer guidance on taxes, structure, and long-term planning.
Keep an Eye on Taxes
Recession-related changes to income, investments or business activity can have tax consequences. Staying in regular contact with your CPA helps you avoid surprises and take advantage of strategies that may benefit you.
For example, if your income drops, you might qualify for tax credits or be eligible to reduce estimated tax payments. Business owners may be able to accelerate deductions, defer income, or carry forward losses. A recession can also be a good time to evaluate retirement contributions and other tax-deferred investment options.
CPAs are in a unique position to help clients understand how changing financial circumstances interact with tax laws—and to help clients adjust strategies in real time.
Focus on Long-Term Goals
While recession planning often focuses on short-term protection, it’s also an opportunity to clarify long-term goals. For individuals, that might mean staying committed to retirement savings or avoiding emotional investment decisions. For businesses, it may involve maintaining key staff, preserving client relationships, or continuing core operations even at reduced scale.
By working with a CPA, you can create a plan that balances immediate needs with future growth. The goal is not just to survive a recession, but to emerge from it in a strong position.
Recessions are challenging, but preparation makes a meaningful difference. Whether you’re managing personal finances or running a small business, having a plan in place can help you stay calm, act confidently, and protect what matters most. Building savings, reviewing debt, managing expenses, and staying in close contact with your CPA are some of the most effective ways to reduce risk and stay resilient.
Recessions are part of the economic cycle, but they don’t have to derail your financial goals. With the right guidance and a clear strategy, individuals and small business owners can navigate economic downturns with greater confidence and control.
by Kate Supino