Managing in a Recession
Amid the Federal Reserve’s implacable rate hikes targeted at rising inflation, corporations and small businesses across the US are increasingly tightening belts at the prospect of a coming recession. While a recession, much like the seasons, is a natural phase in the lifecycle of any economy, it can spell difficult times for companies and consumers alike, especially when it is persistent.
As a result, it pays to think early about the effects of an economic downturn and what it means for the survival of your business. Question what you may need to do differently – or actions you need to ramp up – to come out on the sunny side. Often, you can ensure survival by returning to business basics and getting them right rather than by attempting radical changes across your business.
But it starts with acquiring a complete picture of the incoming possibilities and taking the right steps to help your business through the downturn. We’ve listed some practical steps below that can help your company survive – and hopefully thrive – during a recession.
1. Understand the impact on your business
Recessions don’t happen suddenly. There are usually signs and indicators in the preceding months – and you can take cues from them to anticipate the event and spotlight where your business might be vulnerable.
While each company will experience a recession differently, the most common challenges of this period will include:
- Slowing or halted sales due to dwindling consumer spending
- Decline in available capital as businesses, including lenders, adopt austerity measures
- Wholesale cuts in product sizes, benefits, or quality to cope with leaner budgets
- Rise in salary defaults or stretched payroll budgets
- Low employee morale and productivity
Data presents your best bet to preempt these challenges before they materialize. Scrutinize your business from top to bottom to identify potential weak spots and begin to think around what things might look like when a recession hits.
As you assess the potential impact of the downturn, it’s worth asking how your customers might behave, what your competitors will do, and how you must respond to curtail the effects of the recession on your business.
2. Identify inefficiencies and unproductivity
With limited resources and an unfavorable business environment, you can’t afford to continue carrying unprofitable products or customers. Instead, profitable customers and products deserve your full focus because they offer the best opportunities for continuing revenue through the downturn. Besides, they present a risk of loss to competitors, so prioritizing this segment is critical.
Establishing customer or product profitability should not be a face value affair though. Making a balanced assessment requires a thorough analysis that captures all direct and indirect costs amongst other factors. When you’ve completed your analysis, you can then pursue corrective action on non-performing customers or products, whether through price increases, cost cuts, or removal from portfolio in certain cases.
On the other hand, devise a plan to engage more closely with your profitable segment and devote the resources needed to keep them performing. Identify how your best customers have been impacted by the recession and find ways to support them through the crisis.
3. Exploit cost reduction opportunities
Cost control is a key practice for all businesses, more so in a recession. You’re likely already facing tight resources, so pragmatic spending is critical. The first step should be to conduct a comprehensive appraisal of your business to single out cost cutting prospects. Better yet, start out with a blank sheet and then work from there with only essential cost items.
Discretionary spending is a low-hanging fruit for most businesses, so it’s worth targeting these items for removal. Beyond the short term, costs can only be sustainably removed and kept down with a complete reexamination of your cost bases and the value they produce. Look dispassionately at waste items, inefficient processes, and procurement – they will offer up significant savings opportunities.
Cost cutting is not just limited to your income statement though. It is critical to promote a lean and efficient model across your business. Let cost consciousness permeate your organization from the top down, so everyone is involved and marching to the same tune.
4. Tightly manage working capital
In a recession, your business’ survival will depend on your ability to maintain a steady flow of working capital. With a steady flow of funds, you can limit your dependence on lenders, meet key liabilities when they fall due, and generally keep your business ticking over.
Attempting to keep the cash flowing is likely to be difficult, but the following are some strategies that may help:
- Proactively manage cash payments: Process invoices at speed and stay on top of receivables, aggressively if need be. Deploying extra resources to credit control or offering incentives like early payment discounts may help.
- Tighten inventory management: Maintain inventory at the minimum level needed to meet orders and fulfil customer obligations on a rolling basis.
- Pay suppliers only when due: See if you can obtain concessions or settlement discounts for early or cash payments. Otherwise, only pay suppliers according to agreed terms.
- Plan taxes carefully: Careful tax planning can save you money and retain scarce capital within your business. Rather than employ a “pay now, dispute later” mindset, take a proactive and rigorous approach to your tax obligations. Take full advantage of losses, tax credits, and owed refunds in calculating current tax liabilities and ensure that you claim all available deductions.
5. Reassess your finances
While the downturn will potentially affect borrowing, certain refinancing opportunities may be available to exploit. If you’ve managed your cash, customers, and operations well, you may be able to find avenues to restructure your current debt at better terms or secure new favorable funding.
However, you’ll only enjoy these opportunities by knowing what’s available to you on the market and negotiating effectively with lenders. Also, do some groundwork to learn the best structure for your business and how choosing to refinance may affect other areas of your business, such as tax liability.
6. Maintain constant stakeholder communication
You’re understandably facing a difficult and stressful period, so maintaining open communications lines may be harder than usual. But you’ll be missing an opportunity to secure greater currency with your stakeholders by ignoring them at this period. Plus, opacity during a recession will only alienate those who should be on your team at this point, and that’s not a good idea.
Rather, communicate proactively with the relevant stakeholders, including employees, shareholders, tax authorities, leadership, and creditors. Timely and honest communication will reassure people and boost their confidence in your ability to steer the business through this challenging period.
Keep everyone informed of the threats that the recession poses to the company and the actions you’re taking to mitigate them.
7. Keep your eyes peeled
Lastly, remember that times of great challenge are also times of great opportunity. If you’ve run your company well, you’ll likely find avenues to expand or improve your business during this period.
For instance, previous recessions have shown that merger and acquisition prospects will materialize in many sectors. Taking advantage will depend on being ready for an opportunity and having the financial means to act fast.
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