Let’s assume that you have a process in place for checking your company’s performance on a regular basis. You’ll also be scanning the horizon for warning signs about the national economy, as well as keeping track of your own observations about where you stand in the business cycle. If all of this information tells you that a recession is looming, then it’s time to assemble your inner circle of professional advisors for a strategy session.
In general, there are two possible paths to take. If your financial situation makes you vulnerable, you will probably need to take a defensive posture, cut your overhead as much as necessary, and try to weather the storm. On the other hand, if your analysis shows you’re in solid shape financially, you may want to adopt a more opportunistic approach to the coming downturn.
Now let’s look at some options in four key areas: cash flow, leverage, headcount, and sales and marketing
Cash flow can kill you. If you can’t pay your bills, your business could fail. That’s why securing positive cash flow throughout a contraction has to be your first priority. You’ll need experienced counsel, so make plans to meet with your accountant, your banker, and your lawyer.
Work with your accountant to model scenarios where your revenue falls by 10%, 25%, even 50%. Should you cut production? Reduce inventories? That could hurt your revenue potential even more. You need to devise strategies to optimize your net cash flow at different revenue levels.
Talk with your banker about the availability of credit. If your accountant has noted that you may come up short under certain scenarios, then you need to know what your options are for borrowing. What products are available and how much will they cost?
Finally, your lawyer can review contracts to see if they can be renegotiated on more favorable terms. Remember, everyone will be impacted more or less equally during a recession. Shared sacrifice is usually better than job loss or closing down a business.
For more information on managing cash flow, see this section of the Playbook.
Excess leverage is the next big problem during hard times. If you believe a recession is coming, it’s a good idea to review your debt. As part of your cash flow analysis, you’ll have determined whether and how you can service all of your debt obligations. In addition, take special note if you are required to make any kind of large, lump-sum payment (often known as a balloon payment). Those can be disastrous if you don’t have the cash you need on hand.
If you want to act more aggressively, you may be able to benefit from market conditions during a recession. Although banks may be reluctant to lend, the U.S. Federal Reserve is likely to pump money into the economy by lowering short-term interest rates. This could be an opportunity to take on more leverage at a low cost to you. Then you could use the cash to invest in expanding your business through acquisitions, new hires, or equipment purchases.
Reducing headcount is the classic strategy for cutting costs, because payroll is often a large – if not the largest – expense on a business’s balance sheet. Big, cyclical industrial companies predictably lay off thousands of employees during recessions. While this strategy works to keep cash flow positive, it also imposes great costs. These companies often need to pay severance to keep valuable workers available until the economy improves. And there’s nothing worse for morale than mass layoffs.
Many successful business owners like to boast about the long-term benefits they secured through a policy of hiring talented employees that their competitors had been forced to lay off. When times are tough, experienced professionals may be willing to join you for lower compensation than they’d ordinarily command.
Often businesses cut their marketing budgets during recessions because it seems like a “painless” intervention. People aren’t losing their jobs and, after all, marketing is not a profit center… This reasoning is a form of temporary insanity: If you don’t need marketing during a recession, why do you even have a marketing function in the first place?
Unless your products and services sell themselves, a recession is a period that demands you do your best work in explaining the benefits your business can provide. Clients and prospects may be more receptive to hearing from you during a downturn. They may have more time available to talk. And they probably have their ears to the ground, listening for solutions that will help them make it through the recession.
By marketing proactively, reaching out to your customers and listening to their problems, your business may actually be able to gain on competitors during a recession. Experts caution, however, that less costly channels of communication, such as online content marketing, may be advisable if money is tight.