Eight Smart Steps For Recession-Proofing Your Business
There is one lesson we can draw from the global pandemic: an economic recession can occur at any time. As reported by the National Bureau of Economic Research (NBER), the United States has encountered around 12 recessions ever since World War II, an average of one every six years. Corporate leaders are preparing for a possible economic depression since 2020, but they have no idea when it would occur or how severe it might be. Recessions do occur more frequently than most people know, and the majority of corporate managers will probably experience many of them during their careers. In a survey conducted by CNBC|SurveyMonkey, eight out of ten small-scale business owners expect that the economy will experience a recession in 2022. Despite the fact that it is hard to anticipate when a downturn will begin or how long it will persist, one thing is certain: business owners and corporate leaders should start making preparations now in case there are uncertain economic times in the future.
In this article, we will take you through eight actionable steps to recession-proof your business in 2022. But before we start, let's figure out more about recession.
What Is A Recession?
A recession is a period of a significant decline in the economic activity in the general economic activity in a region. It can be seen in a decline in Gross Domestic Product (GDP), real income, employment, etc., over two consecutive quarters. The period of a recession leads to a rise in unemployment, a decrease in wages and incomes and a loss in economic opportunities across the economic territory. There is a fall in the private investment expenditure on the organizations in that territory and a loss in the education of the region. The impact of the recession is extremely long-lasting, and, despite the high levels of growth during the recovery phase, a large amount of economic planning is required over many years to reacquire economic stability.
The period of a recession leads to a fall in the sales and profits of the business. The small and mid-level businesses lack a significant financial cushion and market power to handle the effects of the recession. They resort to layoffs along with cuts in capital expenditure and research. It leads to a curb in credit access along with an increase in bankruptcies. Larger businesses experience a fall in their share price, and they may be forced to reduce or suspend dividend payments. These businesses may resort to hiring freezes and suspension of pay raises to the employees. These recessions are seen to occur periodically, interrupting economic growth and posing significant problems for businesses and economies alike. The companies that can ride this tumultuous wave can raise share prices during periods of recession, leading to significantly more significant growth for the organization.
How Can A Business Be ‘Recession-Proofed’?
The fundamentals of a successful and positive business hygiene and practices include forward planning, establishing long-term business strategies, and investing in growth etc. However, these techniques have been demonstrated to make all the difference to a business' success during a recession.
If you are a business owner seeking the necessary steps for drafting a business strategy that will withstand a recession, check out the following steps.
- Watch for the signs
Being alert to signs and indications of an upcoming recession helps the company gain an advantage over its competitors. It gives them a better position to judge the situation around them and react to any fluctuations in the economy. Any declines in the stock market prices or a fall in investment value could be an early indication of a recession. Customers and investors may start pulling their money, leading to a company's income dip. The firm must be able to position itself as favorably as possible to minimize the impact of the recession on it.
- Be prepared for the period of recovery
Once the countermeasures are in place and the organization is in the best possible position to manage the recession at hand, it is critical that the organization estimate the recovery period following the recession. The leaders have to take all necessary steps to maximize their income and client base growth during this period. Keeping money in hand for savings is not recommendable. This will lead to a lack of funds available to the company to tackle the recession or to spend on plans.
- Create a plan to manage cash flow and liquid assets
Businesses must not run out of cash and liquid assets during a recession. A company must assess its sources of income and predict the expenditure incurred during this period. Operating within the budget ensures that the company is appropriately positioned to handle the incoming recession.
- Create and manage an emergency fund and pay off previous debt
Every company could use an emergency fund which serves as a cushion during times of struggle. A fund to cover the expenses for six months or continuity insurance could help solve the same problem. Paying down the debt before a recession can tremendously reduce the pressure on the organization as an overhead expense. It can help free up cash reserves to boost liquidity. This ensures the highest amount of capital available upon need.
- Smart Marketing
Smart marketing and revenue-preservation strategies ensure that the company can make money even during this tumultuous time. Smart marketing is the marketing that is appropriate to the needs of the company at the time. It ensures that the companies do not overspend on marketing and can achieve the highest possible returns. The small-scale businesses must have the right access to the appropriate resources to create a smart and efficient marketing plan. Coaching may also be helpful in the process.
- Building a decisive and efficient workforce
A company must assess the number and nature of the employees along with their skills. It should understand its own needs and decide whether the current employees are aligned with the organization’s objective. The company must ensure that the employees are organized and work efficiently to achieve the organization's goals. The employees must be able to analyze and react to the sudden changes that happen during a recession. They should be agile and able to adjust to changing circumstances. Building up their skills by training can help boost their engagement within the company and make them better employees.
Read More: How Employee Training Helps To Boost Employee Engagement?
- Reduce overhead costs
These are the costs that remain constant regardless of a change in revenue and, therefore, are one of the major causes for concern during a recession. There are multiple stages to reducing overhead costs. The first one includes easy trimming- renegotiating business contracts with suppliers and vendors. The second one involves cutting down on travel and entertainment packaged spending, which requires changes in the workflow and cash flow. Drastic measures for the same include employee layoffs, shifting to a remote workforce or suspension of pay rises- which are often the most disruptive.
- Invest in client relationships and create flexible agreements
Staying connected to each client, especially during a recession, is extremely crucial as it helps reassure the client's decision to choose you and boosts client retention. Creating flexible agreements can help enhance customer loyalty by ensuring that the deals offer benefits to both sides. It is suitable to offer rewards in return for customer offers or a contracted volume for sale. This ensures a guaranteed revenue stream during a difficult time.
A company's business leaders have the responsibility of making sure their organization can survive a recession and come out ahead of the competition. If a leader fails to foresee the upcoming economic depression, it leaves the company with no choice but to cut costs using somewhat disruptive methods. The process of recession-proofing begins far earlier than the onset of the recession, and every business should be recession-proofed irrespective of any warning or indication of a recession in the near future. A balance of all the tips mentioned above can help ensure that the organization can tackle the crisis head-on and come out in a period of growth and stability.