When a business gets hit with a sudden, severe sales decline, the decisions that matter most are the ones made fastest. It doesn't matter whether the trigger is a recession, a lost major customer, a supply chain shock, or an industry-specific downturn, the response has to be quick and clear-headed.
There's a concept of "breaking the glass" in an emergency, the way you would with certain kinds of fire alarms. This article is that glass: a checklist of what to consider as you adapt your business to weather a financial storm.
2 challenging business scenarios
Scenario 1: Business sales affected, but not in a financial crisis
When the economy turns and your sales dip moderately, but you still have decent financial reserves, you have time to be thoughtful. Take the next few weeks to evaluate your numbers and make the adjustments the new normal calls for. If you want a structured way to do that gut-check, The 5-Part Financial Health Check Every Ecommerce Business Needs walks through exactly what to look at first.
Scenario 2: Business sales affected and at a financial breaking point
If your business has lost significant or all revenue and you have no financial reserves left, you need to make quick decisions. Here's the checklist we use with our clients.
Step 1: Is your business viable if sales are significantly reduced?
Ask yourself this now, because sales may not bounce back quickly once the immediate cause of the downturn passes. Stress-test against a 50% drop. It may feel like a harsh number to plan around, but it's better to test against the worst case than get caught off guard.
To determine viability, ask:
- Can costs be cut drastically while critical operations continue?
- Can your debts be restructured? (Chapter 11 business bankruptcy is one vehicle for this.)
If the answer is no, go to Step 2. If the answer is yes, go to Step 3.
Step 2: Protect the owner(s) from business failure
This is the worst-case scenario, but it may be necessary to limit damages.
- Stop spending anything non-essential: bills, payroll, etc.
- Find a bankruptcy attorney
- Look at declaring chapter 7 business bankruptcy
This is an ugly option, but if there's no realistic path to continuity, you need to face that reality and limit the damage to the owners' personal finances.
Step 3: Cut costs immediately
Start by asking what spending is actually necessary to fulfill sales, namely your cost of goods sold and critical operating expenses. From there:
- Decide which vendors must be paid, and which ones can be moved to extended terms. Start calling now.
- Stop buying inventory, and cancel or pause any orders where that makes sense.
- Work with suppliers on terms and timing.
- Consider whether you can furlough some or all of your team.
For a step-by-step framework, our 8 ecommerce cost-cutting strategies guide breaks down where to look first, and our cost-cutting quick wins checklist is a fast reference you can work through today.
A lot of this is unpleasant, but this stage is about survival, not comfort.
Step 4: Restructure your debt
Talk to your lenders about better terms, whether that's interest-only payments or a longer repayment window. From there, look at converting short-term debt into long-term debt through options like SBA loans, or state, local, and industry-specific relief programs, whatever's currently available for your situation.
If restructuring genuinely isn't possible and the debt is what's blocking you from moving forward, Chapter 11 bankruptcy is worth considering.
If you're not sure which financing moves actually help versus which ones just delay the pain, our podcast episode on smart financing decisions for ecommerce founders is a good primer before you call your lender.
It's better to pay over time than not pay at all.
Step 5: Turn receivables and inventory into cash
Collect on accounts receivable as fast as you can. Consider factoring, early payment discounts, or offering weekly or monthly payment terms to keep cash moving.
Do the same with inventory: liquidate what's obsolete, and discount what's slow-moving. Just be careful not to set a price point so low that it undercuts you once demand returns.
Apply this same thinking to how you invoice going forward, whether that's shorter payment terms or discounts for paying early.
If you're not sure which inventory to let go of first, why inventory optimization is critical can help you separate what's actually dragging on cash from what's still working for you. And if cash flow visibility itself is the problem, start with cash flow management for small businesses.
Step 6: Plan for the long term
Once the immediate fire is out, shift your focus to how you achieve profitability at a lower sales level. That usually means simplifying what you offer: drop underperforming products or services, and take a hard look at anything that's high margin but difficult to fulfill, or low margin but easy to fulfill, and fix whichever side of that equation is broken.
It also means consolidating channels. Focus on whichever ones are actually profitable, and let the rest go.
Once you're past the immediate crisis, it's worth revisiting what actually drives profitability at your new, leaner scale. Our webinar on what actually makes ecommerce brands profitable is a good place to start.
Every crisis ends. It may take time, but it does end, and the goal is to come out the other side leaner and more resilient, not just back to where you started.
Frequently asked questions
How do I know if my business is in a real financial crisis or just a temporary sales dip?
Stress-test against a 50% drop in sales. If your business could still operate, even painfully, at that level, you likely have time to be thoughtful and make adjustments over the next few weeks. If a 50% drop would make the business non-viable and you have no financial reserves to fall back on, you're at a genuine breaking point that calls for faster, harder decisions.
When should I consider bankruptcy for my business?
Chapter 11 is worth considering if your debts can't be restructured through your lenders and that debt is what's actually blocking you from moving forward. Chapter 7 is the more severe option, and it's for the worst-case scenario: no realistic path to continuity, where the priority shifts to limiting damage to the owners' personal finances rather than saving the business.
What should I cut first when cash is tight?
Start with what's not required to fulfill sales. Cost of goods sold and critical operating expenses stay. Everything else gets scrutinized: pause or cancel inventory orders where it makes sense, renegotiate terms with vendors who can wait, and evaluate whether furloughing some or all of your team is necessary.
Is it better to restructure debt or stop paying it?
Restructure it. Lenders generally prefer offering better terms, like interest-only payments or a longer repayment window, over writing off the debt entirely. It's better to pay over time than not pay at all, and proposing a plan puts you in a stronger position than falling behind and hoping it works itself out.
What's the fastest way to turn assets into cash during a crisis?
Collect on accounts receivable as aggressively as you can, using factoring, early payment discounts, or adjusted payment terms to speed things up. On the inventory side, liquidate what's obsolete and discount what's slow-moving, though it's worth being careful not to set a price so low that it undercuts you once demand comes back.
Let's help you see clearly before you're in crisis mode
When your books are a mess, everything on this checklist gets harder. You can't cut costs you can't see, restructure debt against numbers you don't trust, or know if 50% down still leaves you viable.
