What does a recession mean to your business? Does your business grow or struggle during recessions? The recent bonds data shows a “Yield Curve Inversion” and has lots of people looking for info on how to prepare for a recession. This is usually a 12 to 15-month leading indicator of a market recession. I’ve compiled a list of 5 ways to prepare for a recession just to help you think through this.
Before we dive in, I should clarify that I am not really paying much attention to most news events in my business. I know what my own leading indicators and macro trends are. Many businesses grow during a recession. So, I pay attention to what experts and market indicators are saying (note that I didn’t say “news”), but only as an interested person. My business response is based on my business’ leading indicators and my business’ micro and macro trends.
1) Make sure your business will actually be impacted by a recession
The morning newscaster should not be your primary means of sales forecasting. All recessions are not created equally, they tend to impact different industries every time. Many businesses actually see an increase in sales during a recession (news sites especially… hmmm).
You should have a forecast that includes market-leading indicators. Market-leading indicators are markets that are “upstream” of your business in economic trade. Example: goods transportation industries are preceded by mining, road construction is preceded by heavy equipment rental and government budgets, asset maintenance increase is preceded by asset aging and economic recession. You can search for high level economic leading indicators. Sites like Investopedia.com (automotive example) tend to have sector specific leading indicators. The method is to look for your own business leading indicators with statistical analysis for forecasting.
2) Identify which expenses are discretionary
When sales soften, one of the first things you’re going to do is analyze which items you can reduce spending on. Do this now, ahead of time, when you’re not freaking out. The worst thing you can do in a panic, is reduce spending on things that are critical to business survival.
Open your P&L and mark all of your expense categories with two categories: Discretionary, and Semi-Discretionary. Discretionary items should be fairly obvious, things like bonuses and extravagant company strategy trips. Semi-Discretionary things should be items that can be delayed, but not canceled, like renewing assets and employee education.
If you put anything related to sales and marketing on your discretionary list, you really need to pay attention to the next bullet point. Marketing might be the only thing that keeps your company afloat during a recession.
3) Get crisp on your ROI for investments
As a business, you are always investing in growth and cost savings. In the case of a recession, this area needs some extra focus. Which investments have a true ROI associated with them? Which investments are going to bring in more sales more efficiently with higher customer satisfaction?
Make a list of the things you’re investing in and rank them by importance. This way, when you have to make some tough cuts, it’s clear which investments will be the first to be cut. For those lower priority items, make sure you set up the projects so that you can stop them at any time. Don’t set up contracts that are going to force you to commit to lower priority investments.
Consider investing MORE money in targeted marketing and advertising. Recessions will require more marketing leads than usual for the same level of sales. Recessions are also the best time to gain market share.
4) Identify what will change in a new marketplace
Recessions tend to temporarily change what customers are willing to pay for products and services. The impacts your business, but also impacts all of your competitors too. Consider the impact of both.
Your competitors will be squeezed for sales just like you. Is your competition likely to aggressively reduce prices? Advertise more? How will their changes impact what you need to do? You may need to reduce your product offerings to only focus on items which are highly profitable.
If your business competes on price, then your customer base may be the most impacted by a recession. But, you may also have an increase in customers who suddenly become very cost-conscious. For instance, Walmart’s sales typically increase during recessions.
If your business competes on service, you should understand if your customer base will be susceptible to the recession. Very wealthy clientele are usually less impacted by recessions simply due to having a long term wealth position with extensive cash management. If you compete on service, but your clients are not ultra-wealthy, you may be in a very high recession risk business.
If your business competes on product benefits, you’re in a wildcard category. Recessions tend to temporarily lower the incremental money that someone is willing to pay for add on features. If there is a good next best alternative in your marketplace, a recession may be terrible for your business.
5) Run scenarios for three levels of sales
When you know all of the above, run three financial scenarios for slow, bad, and worse and watch your cash closely. Look at how bad the last market dip was for your business and use that as the middle case. Figure out which projects you would have to cut and what the planning gap is. Having these scenarios ahead of time will significantly speed up your response to market swings when the happen, and they will significantly improve the decisions you make in the moment.
Finally, don’t panic. There are lots of emotions in business. But making decisions out of an emotional or stressed state has been proven to result in worse decisions than normal. If you have to implement this plan, you’ll already be in a tough spot, so don’t stack bad decisions on top of that.