How To Recession Proof Your Business – Proven Techniques
Table Of Contents
- How recession impacts businesses
- 10 Proven strategies to recession proof your business
- Avoid being overly defensive
- Don’t be too aggressive either
- Don’t run out of money
- Think beyond layoffs
- Work on your business plan
- Invest in technology
- Engage stakeholders now
- Build long-lasting relationships with your customers
- Keep marketing
- Explore more revenue streams
The Great Recession was one of the most severe economic crises in modern history, leading to significant job losses, business closures, and a decline in consumer spending.
Now, with recent world events such as the COVID-19 pandemic, war in Ukraine, rising inflation and interest rates, the fuel shortages and the likelihood of another recession is becoming more significant.
The Federal Reserve estimates that the one-year-ahead recession probability is around 35% by 2023, signaling the need for businesses to take proactive steps to recession-proof their operations.
According to a Chief Economists Outlook report by the World Economic Forum, two-thirds of the economists polled believe that a global recession, defined as a shrinking of the world’s gross domestic product, is likely to occur in 2023.
An October Wall Street Journal survey of economists puts the probability of a recession in the next 12 months at 63%.
In January of this year, the World Bank issued a warning that the global economy was in a precarious state and was at high risk of falling into a recession.
As a business leader, are you ready to survive and thrive through another economic recession? Have you identified the right strategies to recession proof your business? If not, this article is for you.
In it, we will explore practical strategies on how to recession proof your businesses that anyone can use to prepare for an economic downturn and ensure they emerge stronger on the other side.
“In a recession, you must be able to call into question everything you’ve done before.”
How recession impacts businesses
Recessions can have far-reaching effects on businesses, both large and small business owners. During an economic downturn, you may experience declines in sales and profits, leading to reduced cash flow and financial instability.
During the Great Recession of 2008-2009, the number of business bankruptcies in the United States increased by 51% compared to the pre-recession period, according to data from the American Bankruptcy Institute.
This clearly indicates how recessions can lead to financial instability and even bankruptcy for businesses, particularly those that are already struggling or heavily reliant on credit.
Companies may also face challenges such as limited access to credit, delayed payments, and increased business bankruptcies. Although the impact of a recession can vary for different companies, the potential hardships can be predicted based on the type and size of the business.
For instance, a small retail business may struggle to retain customers as they cut back on discretionary spending. On the opposite side, a large manufacturing firm may face reduced demand for their products due to a decline in consumer confidence.
Similarly, a small consulting firm may encounter cash flow issues as clients delay payment on invoices. Fortune 500 corporation may be able to save money by cutting jobs and extracting better terms from suppliers.
- Recession can affect any size company. However, larger companies may have more leverage and options for dealing with a recession.
10 Proven strategies to recession proof your business
Regardless of your business nature, size and model, the following strategies can help you recession-proof your business:
1. Avoid being overly defensive during a recession
During a recession, it’s natural for business owners to become defensive and focus solely on minimizing losses. However, adopting an overly defensive mindset can actually harm the long-term viability of a business.
For instance, Sony’s approach during the 2008 recession was too defensive, as they focused solely on cost-cutting measures and delaying investments in innovation and new technology. This approach led to short-term gains in profit margin but ultimately hurt the company’s long-term growth and competitiveness in the market.
When companies take an extremely defensive stance, they may end up cutting back on essential investments in areas like research and development. Or they may forgo strategic opportunities to acquire new assets. These decisions can have negative consequences that can last long after the recession has passed.
Therefore, instead of adopting an overly defensive mindset, take a more strategic and measured approach. This may involve selectively reducing expenses, prioritizing investments that will have long-term benefits, and being open to new opportunities that arise during the recession.
Some tips to help you avoid being too defensive
- Maintain a positive mindset during a recession, as being overly defensive or pessimistic can hinder your ability to adapt and make the necessary changes to your business.
- Focus on the opportunities that are available to you and be open to new ideas and strategies.
- Be flexible and adaptable in your approach. Don’t hesitate to make changes to your business model or product offerings, and be willing to try new things.
- Get advice from trusted financial advisors who can provide an objective perspective and offer guidance on how to navigate the challenges of a recession.
Extreme defensive stances can hurt the company.
Better to adopt and focus on:
- A positive mindset
- Being flexible
- Gathering advice from trusted sources
2. Don’t be too aggressive either
Promotion-focused organizations tend to breed positivity and optimism within their culture, but this approach can backfire in the face of a crisis. Business leaders often overlook warning signs of a market downturn, assuming that their focus on innovation will maintain sales and profits.
An optimistic outlook may inspire forward-thinking employees but a culture of positivity can lead to a lack of awareness about the harsh realities of the market. These organizations may find themselves blindsided by poor financial results, having overlooked the need to adapt to changing customer demands and capture a larger market share.
Need an example? During the 2000 recession, Hewlett-Packard’s CEO Carly Fiorina pursued an aggressive change agenda by embarking on a massive restructuring program, acquiring Compaq for $25 billion, increasing R&D expenditures by 9%, and investing $200 million in a corporate branding campaign.
These initiatives spread the organization too thin. When the recession ended, HP struggled to match the profitability levels of IBM and Dell. By 2004, HP’s earnings had slipped below IBM’s and Dell’s.
Balance being overly defensive with being overly aggressive. Recessions are usually a time to ponder your options more carefully. Try to avoid extremes.
HP’s aquisition of Compaq was voted “Worst Merger Ever” by ZDNet.
3. Don’t run out of money
When your company has a lot of debt, you need more cash to make their payments. During a recession, if less money is coming in, it can be difficult to keep up with these payments. Eventually, it leads to default risk and may force the company to cut costs, often through layoffs.
It’s common for companies to have some level of debt when a recession occurs. A study found that firms that increased their debt levels before the Great Recession had an average debt-to-assets ratio of 38.3%. The group that had deleveraged had a ratio of 19.5%.
While modest levels of debt may not be a problem, it’s a good idea for you to consider reducing your debt if you think a recession is around the corner. McKinsey’s recent research also shows that companies that did better during the Great Recession had reduced their leverage more significantly from 2007 to 2011 compared to less successful ones.
Tips for managing your debt before recession
- Build an emergency savings fund: Establish an emergency fund that covers at least three to six months of operating expenses. This cushion can help your business weather a potential downturn and give you more flexibility to manage your debt payments.
- Review your current debt load: Evaluate your current debt load and identify any high-interest debt that may be difficult to manage during a recession. Consider refinancing this debt or consolidating it into a lower-interest loan.
- Reduce your expenses: Look for ways to reduce your expenses and improve your cash flow. This may include cutting unnecessary costs, negotiating better rates with suppliers, or delaying non-essential investments.
- Diversify your revenue streams: Consider diversifying your revenue streams to reduce your reliance on any one market or customer. This can help insulate your business from the impact of a recession and make it easier to manage your debt payments.
- Plan for the long-term: While it can be tempting to focus on short-term goals during a recession, it’s important to maintain a long-term perspective.
Make sure your business is well-positioned to take advantage of opportunities for growth and investment when the economy improves.
The effort you put into debt reduction before a recession hits will pay off handsomely.
Data shows that companies that reduced their debt did better in the recession that started in 2007.
Techniques for managing debt:
- Build and emergency fund
- Review current debt
- Reduce expenses
- Diversify revenues
- Long term planning
4. Think beyond layoffs
Layoffs can reduce business costs quickly. However, your HR department needs a solid strategy to face the downturn. Managing a workforce during a recession can be a challenging task for organizations. The following are some of the difficulties employers may face
- Differentiating between terminations and layoffs
- Protecting the organization from legal liability
- Handling layoff meetings
- Allaying fears of remaining employees
- Keeping top employees from going elsewhere
- Remotivating remaining employees after layoffs
You must consider these factors while dealing with budget cuts, decreased revenues, and customer retention pressures.
Take a look at the following stats to understand the potential impact of downsizing on your company:
- Teresa Amabile’s study at Harvard Business School revealed that layoffs can lead to a decline in innovation. For example, one Fortune 500 tech firm experienced a 24% drop in the number of new inventions produced after staff cuts.
- Another study found that layoffs can harm a company’s reputation, leading to a decline in their ranking on lists of most admired companies.
Overall, experts are of the opinion that layoffs can lead to higher rates of employee burnout and turnover.
Strategic approach to layoffs
It is not an ideal situation for a company to lay off employees before or during a recession solely for the purpose of preparing for it, especially considering the current talent shortage and the Great Resignation.
The talent shortage makes it difficult for you to find qualified employees. Firing workers could potentially harm your reputation as an employer and make it even harder to attract and retain talented employees in the future. Instead, think strategically:
- Implement a hiring freeze: This means you don’t hire new employees, but don’t let anyone go. It is one of the ways to control costs while still maintaining the existing workforce.
- Reduce work hours: Instead of laying off employees, you can reduce work hours, either for everyone or for some employees. This can help spread the workload more evenly, and can still keep the employees on the payroll.
- Implement furloughs: A furlough is a temporary, unpaid leave of absence to help reduce costs without permanently letting go of employees.
- Offer early retirement: If you have employees who are nearing retirement age, offering early retirement can be a way to reduce the workforce without layoffs.
- Cross-training and reassignment: If some of your roles are struggling, consider cross-training employees to help fill gaps. You can also reassign employees to different roles within the company that may have a higher demand.
- Salary reductions: In some cases, employees may be willing to take a temporary salary reduction to avoid layoffs. You can do this on a voluntary basis, or your company may negotiate with employees to agree on a salary reduction plan.
The Great Resignaton is a trend of employees quitting their jobs in search of “greener pastures”. This leaves a lot of demand for new workers and very little numbers to fill those empty spaces.
You should keep the above in mind when considering layoffs.
If reductions in workforce are necessary than you may want to consider the following points:
- Hiring freeze
- Reduced work hours
- Early retirement
- Cross training or reassignement
- Pay cuts
5. Work on your business plan
In times of economic uncertainty, having a solid business plan can be the key to surviving a recession. According to the Small Business Association (SBA), a well-crafted business plan is the foundation of your business and acts as a map that guides you towards success.
A solid business plan can help you achieve your current goals, as well as anticipate and plan for future scenarios, such as a potential recession.
Here are some tips for making a solid business plan to recession-proof your business:
- Revisit your business plan: If you already have a business plan, now is the time to revisit it and assess whether it’s still relevant given the current economic situation. Determine if you need to adjust your goals, strategy, or tactics to ensure your business stays afloat during a recession.
- Plan for multiple scenarios: A good business plan should include different scenarios, including a recession or economic downturn. Anticipate how your business will react to various economic situations and have a plan in place for each.
- Focus on cash flow: In a recession, cash flow is critical to the survival of your business. Your business plan should address how you will maintain sufficient cash flow to cover your expenses, even during lean times.
- Identify areas for cost-cutting: A recession requires cutting costs, and your business plan should cover which areas you can cut without sacrificing quality or value. Evaluate your current expenses and identify which ones can be reduced or eliminated.
- Consider seeking investment: A well-crafted business plan can also attract potential investors who see the potential in your business, even during a recession. Highlight your unique selling points, market position, and projected growth, so that potential investors are confident that investing in your business is a smart move.
Remember that famous saying, “If you fail to plan, you are planning to fail”. So, take the time to create a solid business plan that prepares your business to handle any challenges that come your way, including a recession.
Tips for a solid business plan:
- Revisit it (if you have one already) and keep in mind the coming recession
- Plan for multiple scenarios. Have contingency plan A, B, C etc…
- Mind the cash flow
- Find cost-cutting areas
- Consider looking for investment
6. Invest in technology
According to a survey by McKinsey & Company, companies that made investments in technology during the 2008 financial crisis were more likely to outperform their peers in the following years.
Another study by Accenture revealed that companies that made strategic investments in technology during the 2008 recession experienced significantly higher growth in revenue and profit margins compared to their peers who did not invest in technology. To be more specific, these companies saw a 30% increase in revenue growth and a 23% increase in profit margins over a three-year period.
The current global pandemic has already highlighted the importance of new technologies for businesses. However, investing in technology during times of economic turmoil is not a new concept.
During the Great Recession, companies that emerged stronger after the downturn were those that implemented emerging digital technologies early on. Although it may seem counterintuitive to invest in technology during uncertain economic times, it can actually be a driving force for business growth and should not be overlooked.
How technology make your business recession proof
Quick example: Robust business optimization software can help companies identify areas where they can cut costs, streamline operations, and improve efficiency.
By optimizing your business processes, you can become more resilient to economic downturns and improve your chances of surviving during tough times. Here is what else you can do with the right technology.
- Enhanced remote work capabilities: Advanced tools enable you to unlock hybrid work models, reducing the impact of an economic downturn on your operations. Tools such as video conferencing, project management software, and cloud storage enable you to maintain productivity even when your employees are working from home.
- Automation: By automating your routine tasks, you can reduce your labor costs, which can be valuable during times of economic uncertainty. Automation can also help you maintain efficiency and accuracy, while freeing up employees to focus on higher-value tasks.
- Data Analysis: It helps you make informed decisions and identify areas where you can cut costs or optimize your operations. Stay agile in the face of changing market conditions and adapt to a recession more quickly.
- Online Presence: In today’s digital age, having a strong online presence is a must. By leveraging e-commerce platforms, social media, and other online marketing tools, you can reach new customers and maintain sales even during recession.
- Customer Relationship Management (CRM): A CRM tool is also a must to maintain strong connections with your customers, even during challenging times.
Optimizing your business process in any way can help you stay afloat and even thrive in a recession. A business optimization software solution like Global Office Data Hub can help optimize your operations.
Keep in mind the following way technology can help your business:
- Enhance remote work capabilities
- Data analysis
- Online presence
- Customer relationship management
7. Engage stakeholders now
Your business partners, clients, suppliers, and other stakeholders play a crucial role in the success of your business. How could you navigate through a recession without taking them into confidence?
To ensure everyone is on the same page during a recession, keep an open line of communication. This will help you identify potential problems before they occur and explore ways to improve your business.
Related: 5 Lessons on Business Resilience and Stakeholder Engagement From the Great Recession
Engage your clients and business partners to address challenges you might face during a recession.
8. Build long-lasting relationships with your customers
In times of economic uncertainty, your existing customers can be the key to keeping your business afloat. While acquiring new customers can be a challenge during a recession, retaining your current base is essential to your survival.
To maintain strong relationships with your customers, it’s important to stay in touch with them without being pushy. Take the time to check in on how they’re enjoying your product or service, and address any concerns they may have in a timely and comprehensive manner.
Having a reliable and accessible customer support system in place is also critical for handling minor issues and inconveniences as they arise. Ultimately, your goal should be to delight and assist your existing customers to the best of your ability.
By doing so, you increase the likelihood that they’ll remain loyal to your business even when they need to make spending cuts.
During a recession, you have to gain new business while minimizing your losses. One way to achieve the latter is by building and maintaining strong customer relationships. So, take the necessary steps to keep your existing customers satisfied, and you’ll be on the path to success. Check out the following tips that will help you along the process:
- Reach out to your customers regularly with personalized messages to show that you value their business. Ask them how they’re doing, share industry news or offer exclusive deals.
- Be responsive to customer inquiries and concerns, ensuring their issues are resolved quickly. This builds trust and shows that you’re committed to their success.
- Surprise your customers with unexpected extras or personalized touches. A simple handwritten note or a small gift can make a big impact on their loyalty.
- Create a loyalty program that rewards customers for their repeat business. This may involve discounts, free products, or other exclusive perks.
- Seek feedback from your customers on how you can improve your products or services, and act on their suggestions.
Focus on keeping your customers by:
- Reaching out to them to thank them for the business
- Be responsive to customer problems
- Surprise them with unexpected extras
- Create rewards programs
- Seek their feedback
9. Keep marketing
When economic uncertainty hits, many businesses often respond by making cuts across the board. However, it’s important to resist the temptation to turn to marketing first without evaluating other departments.
Although marketing may seem like a “luxury” instead of a “need” during a recession, it can actually be a powerful tool in your defense against economic downturns. Attracting new business is crucial to your survival, and maintaining your marketing efforts can help you do just that.
So, avoid significant cuts to your marketing budget. Stay visible and keep promoting your brand to attract new business and deal with recession like a rock.
Marketing is essential to keeping your business afloat during recessions. Cuts in marketing may inadvertedly cut new business and profits at a time when you need all the new business you can get.
10. Explore more revenue streams
During an economic recession, it can be tough to rely solely on a single revenue stream. If your business is all-in on one product or service, you may be making yourself vulnerable to shifts in prospect interests or needs.
According to a study conducted by McKinsey & Company, businesses that diversify their revenue streams are better equipped to withstand economic downturns. In a survey by Deloitte, 82% of companies that diversified their revenue streams reported that it had a positive impact on their business during the COVID-19 pandemic.
Focus on diversification to avoid this risk. By pursuing more target markets, offering a wider range of products or services, or adding more distribution channels, you can create multiple revenue streams that make your business more dynamic.
Recessions often cause shifts in prospect needs and interests. To stay ahead of the game, you should be able to shift with them.
While recessions can be tough on businesses, they don’t have to be catastrophic. By taking the right steps and remaining sensible both before and during economic turmoil, you can keep your business as solid and recession-proof as possible.
So, don’t be afraid to explore new markets, expand your product offerings, or create new distribution channels.
Economic risk can be mitigated in part by exploring new opportunities and revenue streams.
Look for new markets that you can explore and consider extending the range of products or services you offer.
Although economic instability and unrest can hinder any business’s operations, it doesn’t have to be a death sentence. Despite its devastating effects, an economic downturn presents an opportunity for businesses to become more resilient.
By implementing these strategies, you can safeguard your business from the effects of a recession.