Are We in a Recession? Strategies for Small Businesses to Protect Profitability

Economic headlines may argue over whether we are in a recession, but for small business owners, the more urgent question is how current conditions are shaping their businesses right now. Hiring slowdowns, cautious consumer spending, flat profitability, and shifts in investment behavior are all sending mixed signals. For many entrepreneurs, the challenge is not predicting the next economic headline but understanding what these realities mean for growth, cash flow, and long-term sustainability.

One of the clearest signals emerging today begins with staffing, as companies carefully reconsider how they build and manage their teams.

The Signs on the Ground

 

One of the most notable trends currently is caution surrounding staffing. Many businesses are holding off on replacing employees who leave unless the role is essential for operations or sales. Instead, they’re leaning on contractors, part-timers, or combining duties to save on payroll.

At the same time, consumer spending remains sluggish, particularly in the retail and hospitality sectors. Promotions and discounts aren’t driving the same results as they once did, leaving owners searching for new ways to connect with customers.

On the profitability side, client data shows growth has been essentially flat since late last year, with small businesses under $10 million in revenue feeling the greatest pinch. That pressure is compounded by a slowdown in building permits, a decrease in the use of temporary workers, and shifts in the job market.

 

Defining a Recession—Entrepreneur Style

While economists typically define a recession as two consecutive quarters of GDP decline, Greg Crabtree’s definition for entrepreneurs looks at three consecutive monthly declines in rolling 12-month profitability. By that measure, many small businesses have effectively been in a recession since early 2022, when interest rates began to rise and inflation began to take hold.

This “spotty economy” means results vary widely: some necessity or high-luxury businesses are holding steady, while others in more discretionary markets are seeing steady declines.

 

How Entrepreneurs Are Responding

Small business owners are cautious about major capital investments, especially when debt is involved. Many are waiting for interest rates to ease before expanding facilities or fleets. At the same time, reinvestment in systems, processes, and efficiency tools—particularly those tied to AI—continues, albeit at a slower pace due to slimmer profitability.

The mindset has shifted from “grow by adding staff and revenue will follow” to “get profitable with what you have.” This means closely monitoring salary caps, protecting cash reserves, and ensuring operations align with current gross margin realities.

Yet playing only defense isn’t enough. Owners should look for opportunities to invest strategically in sales and marketing while competitors pull back, introduce creative offerings in discretionary markets, and even consider acquisitions if struggling competitors present opportunities.

Important Takeaways for Business Owners

• Get profitable with what you have: Focus on your current gross margin and keep salaries within your cap.

• Protect your cash: A strong war chest ensures flexibility and resilience in uncertain times.

• Play some offense: Use downturns to invest selectively in marketing, efficiency, or even acquisitions.

• Monitor leading metrics: Sales cycles, utilization, and days-to-close tell the story faster than year-end forecasts.

• Stay creative: Bringing new products, services, or approaches to the table helps you stand out when customers are selective.

Learn More

Curious about what recessionary signals really mean for your business? Mike Maxson and Brandon Gray break down what they’re seeing across industries—from hiring slowdowns to shifts in consumer spending—and share how entrepreneurs can protect profitability while still finding opportunities to grow.

Listen to the latest episode of Profitability Playbook: The Simple Numbers Podcast to hear practical insights, client experiences, and strategies for navigating uncertain economic conditions with confidence.