It never hurts to be prepared for a potential downturn in the economy. Based on our History of U.S. Recessions, there have been three downturns in the last 30 years, and of course, nobody can forget the Great Recession of 2008-09. It would be in the best interest of any business to be more recession-proof so you can withstand economic challenges.
Here are three ideas that will help your business be more prepared for a recession.
I was with a client recently, and we were discussing some metrics and ideas to make sure they were more diversified with their customers and products. Just like with an investment portfolio, it is essential to diversify in the following ways:
Take a look at your customers by geographic location. For example, during the last recession, real estate prices in California, Nevada, and Florida dropped 40-50%. Although many other markets such as Texas, Georgia, or even New York didn’t get hit so hard. You would have thought everyone was doing horrible based on the news at the time.
– Customer Industry
Specific industries are affected differently during a recession. According to Investopedia, bargain and discount stores, grocery stores, home maintenance stores, healthcare, and financial consultants do better during a recession. Some industries struggle in a recession, but this can vary depending on what was the cause of the downturn. For example, during the last recession, motor vehicle dealers, construction, furniture, and travel accommodations struggled.
– Products and Services
As the economy changes, you have to develop new products and services to meet the needs of your customers and clients. Be sure to add value and listen to what they need. It never hurts to survey or ask them if you need help in order to become a more valuable and necessary resource. In the service industry, relationships are crucial. In the event of a recession, strong relationships will put you above price-conscious shoppers that are looking for the best deal.
2. Cash and Profit
In any business, we know that ‘Cash is King’, and we are always looking for a profit. If you already have a profitable business with cash in the bank, you can withstand a downturn and last longer than competitors. If you have enough cash and leverage, you may be able even to buy a business at a discount that is struggling. Also, more cash and profit allow you to retain top employees longer, which will be helpful as the economy turns around. I know that this probably seems like common sense. Still, it is common for a business to use all their cash and run losses and narrow margins, even when the economy is doing well. I understand how this can happen as sometimes projections and business doesn’t expand as much as you want. Just be ready to assess and adjust regularly.
3. Scenario Analysis
Louis Mosca mentions in Forbes article to “Plan for Profit”. What does this mean? You should have a good forecast of your business to project revenue, expenses, staffing, and cash flow. Many companies do not do this, which makes it difficult to fully understand how critical investments and changes will affect their business. I suggest running a worst-case version in which there is a recession and see how this affects your business. What would you do if you lost a significant client or revenue dropped 20%? Can you lay off staff easily or make expense adjustments? Where would you get new customers? Are you continually investing in sales and marketing to keep getting leads, opportunities, and new customers? If you had to cut some sales and marketing, would it hurt too much? Do you have cash tied up in Accounts Receivable? What if you had to write off more Bad Debt. I know it can be depressing to run these types of scenarios, but you have to consider what you would do. If you see major issues right now, then now is the best time to make changes instead of during an actual recession.
Now or Later
We know that there will be another recession. When do you want to put together a plan for this? Is it better now or during a recession? Consider improving diversification, planning for more cash and profit, and doing scenario analysis to be more prepared.