The world last faced a major recession in 2007. The Great Recession ended in June 2009 according to economists, during which time the U.S. Gross Domestic Product fell by 4.3%. Unemployment was 5 percent in 2007, rose to 9.5 percent in 2009, and peaked at 10 percent by the end of the year. The recession was longer than any other since World War II, and every area of the economy was affected. One gets a sense of déjà vu when looking back at how events unfolded during the crisis and comparing the government’s response to what is happening today.
What Businesses Must Watch For
The Fed and other central banks believe that similar problems to those in 2007 are happening again. This time, it may be a good idea to watch for signs that a problem is developing and to take action to prevent the problem from getting worse. It is important for businesses to plan ahead in case the economy takes a turn for the worse.
Here are some signs, that business leaders should watch for, that will provide an indication that we are well on the way to a downturn in the business cycle:
- Two consecutive quarterly declines in GDP
- A decline in consumer confidence
- Rising rates of unemployment
- Steepening of credit card and loan debt
- Slowing down of factory output
There is growing chatter among government sources that a recession is inevitable. They say that the worst is not inevitable. Some people do not agree with what the regulators have to say. However, the outlook has darkened considerably since late last year, when expansion was the most synchronized across countries since the Great Recession.
Trade tensions, curtailed activity in the energy sector, and softening global growth have increased the likelihood that the US economy will enter a recession in late 2020 or early 2021.” In other words, the Conference Board is saying that the economy is in a good state right now, but they are expecting it to enter a recession in late 2020 or early 2021.
Broader economic forces are likely to significantly reduce consumer spending and business investment in the near future. In 2022, growth is expected to be 2.0 percent (year-over-year), and in 2023, growth is expected to be 0.6 percent (year-over-year).
Some small and medium businesses might not be able to prepare themselves in time. So, are we there yet? It’s not exactly what we want, but it seems as if we’re heading in that direction! You can make an unwanted journey more bearable by doing some advance planning.
Responses to a Slowdown
Not all companies will follow the same strategy during a recession. The reason for the difference in how executives react during a crisis may be due to the different ways they think. Tory Higgins, a Columbia University psychologist, believes that humans are hedonistic creatures that try to avoid pain and seek pleasure.
There are two basic modes of self-regulation. Others are driven more by a desire for stability and security. People can be motivated by either a desire for stability and security or by goals such as achievement and growth. People who are motivated by promotions are driven by ideals and aspirations that bring them happiness if they are achieved and sadness if they are not.
Some people are focused on avoiding danger, feeling secure, and being responsible. They try to prevent negative outcomes, and feel better if they succeed and worse if they fail. The way we think can be powerfully influenced by our circumstances – for instance, an economic downturn can make us respond in ways that go against our natural tendencies.
By applying this perspective to our empirical research, we are able to classify companies and their approaches to managing during a recession into four types:
- Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
- Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.
- Pragmatic companies, which combine defensive and offensive moves.
- Progressive companies, which deploy the optimal combination of defense and offense.
What can individuals and businesses do to prepare for the upcoming storm? Here are some tips:
Take Stock of Operational Plans
You should review your business plans to account for what may happen in the near future. If you have plans to branch out into new markets, cultivate additional product lines, or introduce a new service offering, revisit those plans with a recessionary lens to see if they are still feasible. Will demand profiles remain the same as you expected? Are your suppliers expected to continue supporting you? Do you think you will still have the workforce you need to make your plans successful?
Review your plans in light of current economic and business conditions to ensure that they are still feasible. You may need to revise your plans if they are not working out. This may mean putting some plans on hold indefinitely.
Review your Financial Plans
In the best of times, Cash is King! During times of economic slowdown, cash is essential. Plan for adequate inflows of cash from various sources to finance your outflows. Make sure that you have enough money coming in from various sources to cover your expenses.
- Inflows
Examine your company’s pricing structure to see if there are any ways to increase the prices you charge customers. In a downturn, be realistic about increases while understanding that your clients are looking to spend less. Be sure to give your customers no reason to consider your goods or services as unnecessary!
You might want to think about selling your surplus assets or inventory, and using the money to contribute to your reserve fund. If you can successfully persuade customers to agree to longer-term deals, even if the rates are slightly lower, it will provide some stability for your income. Keep up to date on government relief programs that may become available and apply as soon as you are eligible.
- Outflows
This means that if you save money, it’s the same as if you had earned that money. Now is a good time to look at your budget and see if there are any areas where you can save money. Three business news subscriptions might be an overkill. Can you do it with one? Would you be interested in reducing your business cell phone data plan expenses? Promise your suppliers long-term contracts for lower rates. And…do the unthinkable: Trim your payroll.
If your product lines aren’t making a profit, or your business locations aren’t sustainable, you might have to close them down. Many businesses are closing down, so landlords are trying to keep the tenants they have. Is there an opportunity to negotiate lower rental rates?
Don’t Be Too Defensive
When faced with a recession, many CEOs believe that their only responsibility is to prevent the company from getting hurt or failing. They quickly create policies to reduce spending, get rid of unnecessary things, simplify their business, lower their number of employees, and save money. They also avoid making new investments in research and development, or in new businesses, or in new assets such as plants and machinery. Leaders who focus on prevention cut back on costs and investment significantly more than their competitors.
Don’t Be Too Aggressive
Some business leaders continue to look for new opportunities even when times are tough. They use a recession to justify pushing change, get closer to customers who may be ignored by competitors, make strategic investments that have long-term payoffs, and act opportunistically to acquire talent, assets, or businesses that become available during the downturn. These strategies are designed to garner upside benefits.
Review your Invoicing Strategy
If you have a long delay between when you bill a client and when you receive payment, you should re-examine your invoicing policy. If you want to be successful in a financial downturn, you need to collect your invoices as quickly as possible. This way you will have more money to work with. If you are finding that it is taking longer than usual to collect payments from your clients, or if you are faced with a higher than normal amount of bad debts or difficult clients, then it is time to review your credit terms.
Pay Down Expensive Debt
Governments are expected to raise interest rates significantly in the coming months in order to tame inflation. If you spend more money, lenders will charge you more money for borrowing. When you are looking closely at your expenses, pay attention to debts that are expensive, such as mortgages and credit card loans.
The Elusive Balance
The companies most likely to outperform their competitors after a recession are those who take a practical approach as defined by William James: “The attitude of looking away from first things, principles, ‘categories,’ supposed necessities; and of looking towards last things, fruits, consequences, facts.” The CEOs of these companies recognize that cost cutting is necessary to survive a recession, but that investment is also essential to spur growth. They must manage both at the same time if their companies are to emerge as post recession leaders.
However, combo strategies are notoriously difficult to engineer. A combination strategy involves both offense and defense and sounds easy to develop, but they are notoriously difficult to engineer. If only it were that simple. Companies usually have three different ways to defend themselves- reducing the amount of employees, making operational efficiency better, or both. They also have three ways to attack or be offensive- making new markets, investing in new assets, or both. This gives nine possible combinations, some of which work better than others.
Review Your Marketing Plans
If you haven’t started using online marketing yet, there’s no better time to start than now! Many of your competitors and peers have closed their shops and only sell online, but you may not be ready to do that. Well, how about a hybrid marketing model? Perhaps it would be a good idea to start selling online instead of in-store, but still have the option to return to the in-store model if the economy improves.
Recessions and economic down-turns can have a big impact on customer profiles. Is your current marketing strategy still relevant? Should you adjust your marketing strategy to reflect the economic conditions that your prospective clients are facing? If this is not the case, then take some time to market yourself to your new target audience.
Operational Efficiency
Many businesses cut costs aggressively to stay afloat during an economic downturn. According to the text, companies that focus on improving operational efficiency (by streamlining processes, eliminating waste, increasing productivity, etc.) do better than those that focus on reducing the number of employees. Progressive companies don’t lay off employees as often as their peers do. Progressive enterprises are far less likely to cut staff than prevention-focused companies, with only 23% doing so compared to 56%. They also lay off far fewer people.
If a company only relies on cutting its workforce, it only has an 11% chance of doing very well after a bad time. There may be several reasons for this. From our experience, companies that prioritize operational efficiency typically have better morale. Employees working for these companies feel valued by top management and as a result are more innovative when it comes to finding ways to reduce costs.
People who work at companies that rely on deep staff cuts spend their time worrying about job security, while those who don’t work at such companies don’t spend their time worrying about job security. While layoffs may help reduce costs in the short term, they make it more difficult for a company to recover in the long term.
If companies wait too long to start scaling up their operations, they may have difficulty hiring the extra personnel they need. People are less likely to want to work for organizations that reduce their staff during tough times. Moreover, as these companies rehire, costs shoot up.
Parting Thoughts
They say well-planned is better managed! This is what businesses must do in order to manage an economic downturn. Look over your business operational plans, examine your financial plans, and go through each line of your income and expenditure plans. If possible, try to reduce unnecessary spending, and delay (or cancel) non-essential expenses.
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