8 Steps to Recession-Proof Your Business
Most economists have come to the conclusion that a recession is imminent – if not already here – as the drive to stamp out the novel coronavirus (COVID-19) has businesses being shut down and employees sent home. Many of these employees are either being officially laid off, or effectively laid off if they are hourly workers. Unemployment claims have already jumped and based on estimates from people way smarter than me – are going to go way higher soon. So now what do we do?
See logical next steps in a recession…
The Department of Labor recently reported that weekly jobless claims for the week ending March 14th came in at 280,000 or an amazing 33.2% above the 211,000 claims from just the week before. This was the highest level of unemployment claims since September 2, 2017 when claims were at a 299,000 level.
This jump of 70,000 new claims is due to the novel coronavirus sweeping the country, forcing communities and companies to close down and send workers home…effectively ending economic activity. Furthermore, companies facing instant financial hardship are cutting staffing levels, sensing a potential long road back to normal business levels.
Top Investment Banker Revises Economic Forecast to Certain Recession
Economists at financial powerhouse Morgan Stanley, a leading investment banking firm, have revised all of their economic forecasting and now believe that a global recession in 2020 is their “base case.” In other words, it is not a question of whether there will be a recession or not – only how severe that recession will be.
“Global recession in 2020 is now our base case. With Covid-19 spreading in Europe and the US after hitting Asia, the disruptions and dislocations in the economy and markets will trigger a [year over year] contraction in global growth in [the first half of 2020].”Chetan Ahya, Morgan Stanley Chief Economist
Morgan Stanley is hardly unique in these thoughts as most economists have come to believe that COVID-19 has already overwhelmed the world economy and the U.S. will not escape an economic contraction. With the already dramatic jump in jobless claims, it seems inescapable that those ‘wheels are in motion.’
Just Exactly What is a Recession?
So just exactly what is a recession? For decades, the most accepted definition was that a recession was declared when there were at least two consecutive quarters of decline in the economic activity in a region. Now, however, that definition is changing, according to the online Investopedia, who notes that the “…National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Typically, it can take up to two years for the economy to fully recover from a recession. If there is any silver lining in this mess in which we find ourselves – at least as far as Morgan Stanley has assessed – the American government appears to be taking aggressive actions in terms of fiscal and monetary policy to try and stimulate growth. For this reason, the big investment banker believes that the U.S. economy will return to growth by early-to-mid-2021.
How to Prepare for a Recession
About eighteen months ago, Strata-gee suggested steps that Tech companies could take to prepare themselves to weather the storm of a recession. And while that article may have been a bit ahead of its time, I believe much of the advice is still solid. Below is a revised version with some new ideas added.
There are essentially eight steps you should consider taking to bolster your ability to “ride out the storm.”
Eight Steps to Prepare for a Recession
- Build Cash Reserves – In a down economy always remember cash is king. So find ways to build cash. For example you could liquidate excess inventory to convert unneeded goods into cold hard cash…hold off on your capital spending you had built into your plan…delay adding another truck…cancel all overtime…push off upgrading office computers…don’t lease a new forklift…forgo racking your warehouse, etc. Keep your cash close at hand and pad your cash cushion as much as possible.
- Delay Planned Capital Expenditures– Certainly some decisions are time sensitive, but as alluded to above many of our decisions are delayable. Had you planned on expanding your facility due to past growth? Or maybe you had decided to launch into a new product or business segment. Or perhaps you were going to add some other brands to your line-up in hopes of expanding your merchandise assortment. You had probably created these plans back when the economy was growing, but having now fallen into a recession, you should shelve these ideas until the economy turns around.
- Become a Cash Flow Ninja – Another corollary of building cash, you should get intensely involved in managing the flow of money through your business. First, reach out to ALL of your vendors and suppliers – before there are problems – and negotiate extended payment terms. Don’t be shy, the squeaky wheel gets the oil and if you wait until you’re having trouble paying your bills, they’ll be less likely to cooperate. At the same time, reach out to clients – customers – or dealers and offer incentives for them to pay bills early. To most customers, this anticipation seems like a great deal as they are already on the hook for their bill anyway – but now they get an extra discount to pay it a little early…a true win/win. Will this eat a little into your margins? Yes…but, say it with me once again, “Cash is King.” Rethink your policies for new deals, including requiring larger deposits, quicker progressive payment schedules, etc.
- Aggressively Manage Inventory – Now is the time to aggressively manage inventory. Over time, it is easy to have multiple items that do similar things. When you think it through it is often possible to eliminate several items to centralize utilization on fewer items you do more with. This lowers your sunk costs, improves your efficiencies, and can grow profits…and frees up cash. Also, cut your target inventory levels and move to a just-in-time inventory program on all items. Finally, sell off all slow moving, old, or dead stock – turning your under-performing inventory into cash.
- Rethink Staffing – You’ll certainly want to freeze hiring as you face lower economic activity. But what if you’re in a bind on already booked projects? Consider working with one or more of the industry-centric temp staffing agencies that can “rent” you a staff on a temporary or by-the-project basis. Look for opportunities to send hourly employees home (if you have them) at slow periods. Also, cut back on all overtime. Eventually, you may need to lay off staff, so start thinking about that ahead of time so you’re prepared for when that day comes.
- Do…Not…Cut…Marketing – But under any circumstance you should not cut marketing. Marketing is always a necessity…but this is even more the case in a recession. You need to be regularly promoting to your prospects more than ever. An added plus is that your less-enlightened competitors will have all canceled their marketing, giving you a clear path to increased market share. You will be able to ride the wave of this increased market share as the economy rebounds.
- Conduct a Full Business Review with Your Accountant – Now is a great time to do a full review of your books with your certified public accountant. Accountants are a great resource for ideas on ways to cut some easily overlooked overhead and improve cash flow. You should be doing this on a regular basis with your accountant anyway – but now is a great time for a recheck, challenging her or him to help get your books in order.
- Don’t Panic – Last but not least, don’t panic. The first step in protecting yourself is simply to be aware of the need to do so. You’ll find that as you put your mind to it – perhaps brainstorming with your managers and staff, as well – you’ll be able to come up with a lot of creative ways to build cash reserves, tighten your belt, cut your overhead, and steel your business for the downturn that is coming.
The original post that some of these ideas came from was suggesting these steps should be taken in advance of a recession. It may be too late for that now. However, the concepts remain essentially the same. See the entire original post these ideas came from here…
What steps have you taken to prepare your business for a recession? Share your ideas in the “Comment on this Post” below.
Paul Starkey says
Ted all Monday morning QBs say increase cash reserves in times like this cash wins Unfortunately most owners CI have pulled cash out of their businesses Most individuals were riding the stock market wave up So sideline cash for many isn’t an option
All the measures stated are appropriate
Collecting and getting new business will all be very tough
Vendors are already retreating Dealers need to finish work and get pre paid when possible
Lean is better in these times
2021 will be a recovery year but holding on the next 9 months is not a given for many including your favorite restaurant