Currently, the news is flashing with markers about the upcoming recession. Inversion of yield curves and the slowing increase of the interest rates are only two of the items frequently mentioned in the press. However, while the articles usually look at the consumer and investor side of the issue, the business side is often untouched. Nevertheless, it is crucial, no matter how small or large the business is, to prepare for a slowing economy.
Recession is Coming
Like the catchphrase in George R. R. Martins a Song of Ice and Fire, more commonly known through the TV show Game of Thrones, “Winter is Comming,” we can be confident that the next recession is coming. After many years of booming economies, our normalcy bias, however, tells us, that it will not be a problem after all the last years were great. Thus the first step of preparing is to accept that the next recession is coming and that it is better to prepare now for it then to leave it up to chances or quick adjustment once the downturn is there.
On the other hand, we should likewise not engage in too much of a panic. We survived the last recessions and will get through the next one as well.
Being aware, that the recession is coming and that it is manageable is the first crucial step. You can only prepare for the situation if you accept reality.
Require a Plan
Whenever, you prepare for something, require a written plan. Having the concept written down ensures, that it is thought out and understandable for all employees. It also means, that board members can hold the executives accountable.
Seeing iterations of the plan also imply that the management considers input, questions, and concerns. Without a written plan it is easy for an executive to say later “we never meant it this way.”
Sustainable Business Model
If you were heading a home builder at the onset of the 2007 great recession, you would have been all optimistic. Growth was excellent, and everyone could get a loan for a new home. However, a lot of these loans were subprime loans, and the borrowers could not repay them if they lost even a month of income. Consequently, when the economy slowed, many builders went out of business because loans did not close and they sat on mountains of inventory.
Checking, whether or not your business model is sustainable when the recession comes is thus of critical importance. The two key questions you should ask is, is the company able to keep its customers if their disposable income shrinks and do we have any debt, that could hinder us.
Especially the debt question can be critical. During a cooling of the economy, the willingness of investors and banks to grant new loans or refinance old ones shrinks. Thus if your company has significant debt coming due in the next two years, starting to secure financing now or planning how to rid the business of it, should be a top priority.
Innovation is Key
Once we go into a slowdown, our first step is often to cut costs. Shrinking Marketing and R&D are often at the forefront of every executive’s mind. However, these two areas are essential to turning the recession and following growth period into a triumph. If you are one step ahead of your competitors in your product and its positioning in the market, you can significantly increase your market share.
As conventional wisdom dictates to shred people to keep the books balanced, a recession might be an excellent opportunity to recruit new talent. People are willing to accept lower wages and are more readily available. Thus, you can strengthen your teams at a reduced cost and up your game both in the recession and during the coming upswing.
M&A all the way
Similar to the increase in talent, some businesses will go for sale during a downturn. They might not be stable enough to sustain their operations during these times but might have intellectual and real property, that can help you better position your organization. When everyone is strapped for cash having the ability to buy into these organizations or outride buy them, can be an excellent opportunity to strengthen your companies position.
Time for a Leap of Faith
A recession is often a great time to strengthen your companies competitive position. With a well-developed plan and an apparent growth based objective it becomes possible to turn a threat into an opportunity. However, only if your company is in a position to grow will you be able to move ahead and be in the best place for the upswing that follows every downturn.