The economy has been a regular topic of conversation throughout 2022. Despite ongoing job growth, inflation is at a 30-year high. The Fed is engaged in a battle to fight a recession and continuing inflation by increasing interest rates, but so far, their actions haven’t been enough to tamp down rising prices.
Companies are well aware of the potential for a recession, and some believe we are already in one.
Recessions tend to spark fear among consumers and businesses. After all, the Great Recession of 2008 led to numerous layoffs, and many organizations had to close their doors forever.
However, there are ways to ensure that your organization stands ready for a recession and comes out better on the other side. Consider these tips for preparing for a potential economic downturn.
During a recession, consumers reduce spending, and businesses are less willing to lend money. Companies dependent on revenue to cover the cost of high debt can quickly find themselves underwater if they don’t have the funds to cover their liabilities and expenses.
To get a handle on the problem before it’s too late, try to:
History has shown that companies with high debt levels are more likely to fold during a recession. In fact, a study of 4,700 public companies during the economic slowdowns of 1980, 1990, and 2000 found that 17% didn’t make it through intact. Some went bankrupt, while others were taken private or acquired.
Overwhelmingly, the companies that could not survive had high levels of debt. The drop in revenue that a recession typically brings, combined with excess liabilities, was too much for them to survive.
A small fraction of the studied companies performed well during the recession and continued to achieve revenue growth in the following years.
The companies that thrived during the recession took significant steps to prepare for the downturn, including (but not limited to) considering:
Many organizations follow a centralized organizational structure, with a traditional C-suite org chart in which senior management handles most of the decision-making. While that can be effective for many companies, often, it’s better to give local teams more accountability for resolution during a recession.
The theory is that:
Allowing middle managers to make quick decisions without going through the bureaucracy of senior management keeps the organization nimble.
If managers are unwilling to decentralize the organizational structure completely, they can spend more time with their team to understand what problems they’re facing.
For instance, senior leaders can schedule weekly meetings with each department to learn how the recession is impacting them. Quality insights from the team allow managers to make decisions using real-time information.
Sales and marketing are often the first to know when there’s a decline in consumer purchases, while finance can alert managers of late customer purchases or large bills that the company needs to pay.
A company’s knee-jerk reaction to a recession is often layoffs. After all, if the organization cuts the number of employees, it will quickly reduce expenses and be on better financial footing.
However, layoffs are detrimental in numerous ways. In fact, layoffs cause:
When employees leave, their knowledge and skills go with them. Other workers will need to pick up the slack, handling tasks they weren’t previously responsible for. Learning new skills on the job takes time, and workers will likely make mistakes.
Once the economy rebounds and the company has more money to expand its workforce, managers can rehire. But finding new employees and training them is costly and time-consuming. It can take several years to re-establish the productivity the organization once had.
If the company can’t afford to keep its workforce, consider alternatives to layoffs. Managers can opt for short furloughs, where workers take several weeks off the job unpaid before returning to their regular duties.
Another option is cutting bonuses or other incentives. While cutting incentives can reduce employee satisfaction, it allows them to keep their jobs, and managers can reinstate the incentives once the economy rebounds.
While spending money on technology may seem to be the opposite of what a company needs to do when cutting costs, it can bring significant benefits. Software is typically less expensive than other assets and can provide strategic insights into business performance.
Much like input from mid-level managers, better analytics from specific departments can improve the company’s decision-making. With analytics, managers receive real-time information on sales, customer retention, and opportunities for improvement.
Technology can also automate some tasks. If the organization needs to spread out responsibilities due to layoffs or furloughs, automation can free up hands to handle other tasks.
Finally, IT has a way of increasing efficiency and agility in organizations. The more managers can use its capabilities to improve business functions and products, the more productive an organization will be. Some software can positively impact the supply chain, while other technology can help manufacturing by adjusting production volume.
Recessions are often unavoidable. Shocks to the economy, changes in the supply chain, and rising prices can all lead to a recession. However, companies that stay well-informed of their performance and prepare in advance are more likely not only to survive but to flourish during a downturn.
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We also invite you to continue exploring more executive recruiting insights from our team: