Like a house in a storm, a business during a recession will only survive if the structure is solid. In difficult times, most businesses will see cash flow dwindle, sales spiral downwards, and customer loyalty decrease. During such economic depressions, smaller companies are generally more vulnerable than their bigger counterparts, due to lower reserves. That said, during periods of economic downturn, business prosperity comes down to preparedness, tact, and anticipation. Ultimately, business size shouldn’t factor when it comes to protecting your business amid an impending recession.
Business Resilience During A Recession
In 2019, the Harvard Business Review (HBR) published an article focused on company resilience during times of recession. The review specifically scoped businesses, that within their respective industries, survived, flourished, and produced outstanding stakeholder returns following a previous slump.
Results indicated that resilient companies recovered between 6%-8% stronger more than their competitors. In comparison to their counterparts, such companies indicated minor performance decreases and demonstrated substantial gains during the economic recuperation period.
What Makes A Company Resilient?
The difference between resilient and non-resilient companies doesn’t lie in product and service quality. In fact, the loss in revenue suffered by resilient companies was similar to that of non-resilient companies, in the same industry. Resilient businesses achieved economic prosperity throughout, and post-recession, by “reducing operating costs earlier in the cycle.” As HBR reported, during the recession’s lowest point in 2009, resilient companies had a 10% increase in their earnings before interest, taxes, depreciation, and amortization (EBITDA) while those who failed to reduce operating costs early on experienced an almost 15% reduction in growth following the recession.
How? When the economic downturn became increasingly apparent, resilient companies moved their focus towards increasing earnings, sustaining loyalty with highly valued customers, and relaxing their investment-planning objectives. These strategies allowed such companies to be better prepared for the mounting economic recession and thus enter the crusade with adequate cash flow. Given that they had more financial leeway than their counterparts, resilient companies could afford to be flexible during such times. Subsequently, when the economy started to take a turn upwards, resilient companies were able to “acquire the assets that industry peers were dumping in fire sales.”
Make no mistake, foolproofing your business for a (future) recession requires time and strategic planning. According to McKinsey Senior Partner, Sven Smit, a big part of recession preparation lies in business leadership. Unfortunately, many business leaders don’t think about business life after a recession and are quick to cut resources, costs, and staff based on the looming situation. It is imperative that business leaders don’t make rash decisions based solely on economic doom. Recessions never last, so factoring in a business’ future, is just as important. Smit’s advice is simple: “…the healthier (a) business is today, tomorrow and the next quarter, the more resilient (it) will be in a downturn.”
5 Simple Steps Businesses Can Protect Themselves From an Impending Recession
Target Employee Education
Businesses that re-skill their employees will be ahead of their competitors long-term. A focus on enhancing employee function and skillset can make all the difference in how prepared employees are for business changes and vulnerability, during and post, recession. Investing in employee upskilling will also ensure that employees continue to grow their skillsets and professional capabilities in order to adapt to market variabilities and business transformations, such as the digital shift we are currently experiencing.
A good business leader will keep their employees under their wing – protecting them, guiding them, and involving them in decisions and best practices. Businesses that have such leaders and work hard to retain employees, will see that the knowledge and insight employees gained will leave the business well-equipped in the event of a recession and in good stature during the recession recovery phase. Early investigation into government support, and researching labor laws, will navigate how a business can manage and retain employees during a recession.
Revaluate Investment Methods
Under the productivity umbrella comes the revaluation of investment methods. Many leaders who predict recessions tend to postpone investment activities. While this is not necessarily always a bad judgment, the decision to do so could be costly to the business. Where one business may have opted out on seizing (an) assets, such opportunities become another business’ treasure.
Business operations shouldn’t come to a standstill just because the economy is sliding. The impending situation should be seen as an opportunity. In a podcast with Tim Dickson, Executive Editor at McKinsey, Sven Smit suggests that before and during a recession, “The best examples are the people who have continued to invest. They continue to invest in pockets of demand that you know are there… (such as) technologies and electronics… something for which there is infinite demand. It might just be cyclically gone for a while. It doesn’t make sense to stop (the) investment…”. In conclusion, thoughtful investment guided by a financial advisor can be very beneficial.
Discuss the (Digital) Future
Many business leaders may be hesitant to diversify and feel challenged by digital disruption. Leaders who avoid digital disruption will ultimately see demand decline and elements of their business exposed. Working with and investing in ‘the digital’ will invite profit. After all, the future is digital. With respect to the recession itself, business leaders should reflect on the impending situation.
This is where leadership skills show. When contemplating an impending recession, business leaders need to be realistic. As challenging as it might be, leaders need to confront the ´doom and gloom´, but remind themselves that the future is bright. A business will only withstand a recession if its leader(s) and staff go into it equipped with the tools to come out successful on the other side.
Business leaders who soften the possibility of a recession will fail to cope in its midst. While those who are open about the economic downfall and begin recession discussions with facts and possible solutions will find that their business and staff are better prepared for the future.
Customers and Marketing
Customers are a business’s weight in gold. If a business is going to prosper through economic hardship, retaining and gaining customers is essential. Preparing for a recession will entail undertaking competitor research, maximizing on competitor gaps or failures, offering unique services, and enticing competitor clientele.
Financial crisis or not, a business leader shouldn’t cut-back on marketing activities. Marketing should in fact be increased if a business leader predicts economic collapse. This may involve rethinking marketing strategies and surveying potential (and/or competitor) clients to see what services and/or products can be integrated into the business and benefit those people. When it comes to current customers, the same applies. Excellent customer service and experience, as well as thoughtful marketing, are important factors for recession survival.
Streamlining Operations and Re-Directing Resources
If cutting costs is a sure-fire decision for a business, leaders should look at augmenting productivity and streamlining operations, to obtain otherwise similar results at a fraction of the cost. Use the economic crisis as an opportunity to re-evaluate practices and procedures. Where can costs be saved and redirected?
Reviewing inventory management is one way of directing costs in a smarter way. This might mean adapting to new ways of doing things and trying other methods to improve efficiency. Similarly, it could be worth dropping products and services that are not benefiting the business. Profit is the focus. Many business leaders tend to add products/services during economic hardship in order to be different from their competitors. That said, be sure to do your research first.
Protecting Your Business Impending Recession
A recession is rarely good for a business. While there’s no surefire way for a business to be 100% protected, there are plenty of steps you can take to avoid feeling panic. By integrating resiliency-focused strategies into your business model early, leaders can be assured that their business will be closer to being “recession-proof.”
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