Financial downturns are a natural part of the economic cycle, and more of a ‘when’ then ‘if’. Nonetheless, they bring along with them all kinds of fear and unpredictability. Customer demand and revenue fall during a recession, leaving businesses big and small extremely vulnerable. It all makes for a pretty potent cocktail of financial uncertainty.
Recently, there has been a lot of speculation that the current conditions are ripe for a global financial crisis and many experts have warned that a financial downturn is well overdue.
However, for many corporate and business leaders, they aren’t so worried about when a recession will actually hit. Instead, they know that most importantly, it pays dividends to be one of the few who are in the know early and can seize the moment when it does arrive.
A 2010 Harvard Business Review article “Roaring Out of Recession” found that during all the recessions of 1980, 1990 and 2000, 17% of the public companies they studied either went bankrupt, private or were acquired. But even more importantly, they found that 9% of the companies they studied didn’t just recover. For the three years following the recession this handful of companies actually flourished, outperforming their peers by at least 10% in sales and profit growth.
So what was the magic ingredient that was the difference between being wiped out by the recession or actually doing better because of it?
For the answer, we turn to the man printed on money himself. In Benjamin Franklin’s famous words, “by failing to prepare, you are preparing to fail.”
Preparation is key
Financial downturns have a habit of widening the gap between the ‘winners’ and ‘losers’, but most importantly they favour those who act before the downturn. The companies who have suffered the most in previous recessions were unprepared and had no choice but to play defence. “When the downturn hit, they switched into survival mode, making deep cuts and reacting defensively,” according to the HBR report.
Whether you have a small business or a big company its important to make sure you are on the offence, thinking about alternative scenarios and making contingency plans. Think of a recession like a high-pressure test in change management. You are out on a sailing boat in the middle of a storm and it’s sink or swim. To navigate through and come out the side of the storm intact, a company needs to be flexible and ready to adjust the sails.
So what can you do to make your business recession-proof?
Manage costs, and manage them now
This might seem blatantly obvious but Rebecca Henderson of Harvard Business School reminds us that “Rule one is: Don’t crash the company.” First things first, don’t run out of money.
Cash is the lifeblood of your business and should be protected at all costs. For this reason, it’s key to manage costs before a recession hits. It’s important to remember that every business will enter a downturn from a different starting point. Understand where your company sits, develop a plan that starts early, focus on sustainable changes and stress test your balance sheets through turbulent scenarios.
Why not review your inventory management practices, and see if there is anything that can reduce costs here without sacrificing quality or customer satisfaction? Also, consider how digital technologies could provide opportunities for your business to move faster. For example, FedEx has implemented robotic processes to automate tax, payroll, credit card reconciliations and all their other financial processes.
Another option is to consider deleveraging (reducing debt by selling one’s assets). In early 2000 Amazon.com sold $672 million in convertible bonds to cement their financial position. Only a month later the dot-com bubble burst, and many of Amazon’s then-rivals went belly up. Had the bubble burst a few weeks earlier, one of today’s most successful companies might not be around to tell the tale.
Play offence and play smart
You’ve probably picked up on the trend that it’s all about being ahead of the game when it comes to surviving a recession. The companies who came out the strongest from previous recessions, went on early offence while their competition focused on simply staying afloat.
The best way to do this is to start with the end in mind. Think about where you want your company to be when the dust settles. Having a future-forward approach will help you figure out where to invest, what markets to target and what technologies you will need.
Here are a few common trends among companies that have thrived post-recession:
- They invested in research and development instead of reining it in
- They maintained marketing while competitors cut back
- They focused on improving the customer experience
- They had a proactive mergers and acquisitions strategy
A recession is like a sharp curve on a racetrack. It may be the most difficult part of the race but it’s also the best place to pass competitors. It requires skill and the best drivers will apply the brakes (cut excess costs) just ahead of the curve, turn hard (know where the business is heading) and accelerate (invest in growth) hard out of the curve.
Nothing is guaranteed. We don’t know when a recession will next hit or how bad it will be. What we do know is that from previous experience, recessions create a wide and long-standing gap between companies. What you can control is how prepared you are, so that you have the best shot of not only coming through the finish line but ending up in first place.
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