By Steve Williams CExP™, CMMA
What is a recession and why does it happen?
One common definition of a recession is two consecutive quarters of decline in the GDP. The National Bureau of Economic Research, which dates recessions in the U.S., defines one as “a significant decline in economic activity spread across the economy, lasting more than a few months.” As long as all of these conditions are met to some degree, the NBER is willing to treat them as interchangeable. For example, the severity and pervasiveness of the COVID-19 downturn in the spring of 2020 led the NBER to call it a recession, albeit one that officially lasted just two months.
By any definition, recessions cause job losses and a contraction in economic output as consumer spending and businesses slump.
Mistakes businesses make during recessions that lead to failure
We’ve all heard about the 2008 recession and how it led to many businesses failing. But what are the mistakes businesses make that lead to failure during a recession? Here are some examples of those mistakes and how they can be avoided.
Companies often reduce their margins too low by not maintaining prices or failing to cut unnecessary costs. Many companies react to falling prices in the marketplace by cutting their own prices or being more liberal with their discounts. The litmus test here is how your customers perceive you in relation to your competitors. If representative feedback indicates your offering is of more value than your price cutting competitor’s, then maybe you can maintain your price. Of course, there is never a bad time to jettison unnecessary costs, but a recession may be a good reason/time to make cuts that were previously unpopular and/or perceived internally as being unnecessary. Remember that cash is king, especially during a recession.
Another mistake that can lead to failure is to not have a contingency plan in place for when things go wrong financially. Don’t wait until your company is thrown a curve ball, e.g., your largest client demands extended payment terms, a major client closes its doors, or a supplier is not able to meet demand and the alternative is more expensive, to name a few—sit down with your key personnel and ask what mechanisms are available to your company to ensure you do not have a cash crunch when new revenue is tough to come by. This can involve many areas that you may never need but which are nice to have available to manage your business during tough times: extended credit facilities from lenders, source alternative suppliers, or develop new payment terms for clients to get cash in the door quicker.
Checklist to survive and thrive during a recession
The recession is a difficult time for most businesses. But it’s not the end of the world. Here are some tips and strategies on how to survive and thrive during a recession.
- Achieve alignment with industry – By having an independent third party/source specific to your industry, review your key ratios, e.g., profit, direct and indirect cost, to make sure they are in line with industry standards. A penny saved is a penny earned and will help your company maintain healthy cash reserves.
- Establishments with a number of employees – Require that your payroll is reviewed by an independent third party or reviewed against a salary survey. This ensures that you are not paying any unnecessary or excessive wages or benefits. It also provides you with an idea of where your salaries, wages, and benefits are lower than industry for same or similar skillsets—if these employees are important, get that fixed before they leave to work elsewhere and make it harder for you to weather the recession.
- Go on the offensive – Downward trends in the economy often create opportunities as consumers and other businesses adjust their buying behaviour. Talk to your customers to find out how they plan on changing their spending to adjust to the new economic conditions—reposition your current offerings or create new ones to take advantage and be an early mover.
- Start looking for deals – Focus your efforts on mitigating the effects of economic downturns by increasing revenue and making your company more resilient. The best way to do this is to spread smarter investments around the business portfolio and find additional sources of profit. For example, perhaps there is equipment available from a distressed company, and is needed by your company, that is available at an attractive price and terms, and can immediately add incremental revenue to your business.
- Find clients and prospects that are bucking the downward economic trends – The best way to regain or maintain market share in the event of economic downturns is to determine which customers are showing signs of stability and growth—then make sure they are your top focus for sales and new offerings. When things are going well for your customers, they are more likely to increase their spending—this means that you need to offer them something new and special in order to earn more business.
- Consider cutting costs by outsourcing certain tasks, like customer service or IT support, which may be more expensive to maintain internally.
- When employees leave positions that still need to be staffed, consider hiring freelancers for less money than what you would normally pay full-time workers to do the same quality of work. Use a freelance company, like Fiverr Pro or Toptal, to find and hire temporary contractors quickly; then you have more flexibility as to when to go back to full-time employees when there aren’t the recessional pressures.
- Keep spending on marketing that has proven return-on-investment – The Harvard Business Review, Why Family Businesses Come Roaring out of Recessions studied businesses that recovered more quickly than others from the 2001 and 2008 recessions. There were three areas the companies that were quick to recover focused on, that the recovery laggards did not, and all three were related to marketing: they continued product launches during the recession, they maintained their advertising spending to pre-recession levels, and they maintained their emphasis on corporate social responsibility regardless of the state of the economy.
Recessions create new challenges for most businesses, but by looking out for what has negatively impacted other businesses in past recessions and being armed with tactics and strategies to improve the health of your company during a recession, a recession does not have to be bad news. Instead, it can motivate you to make your company even better and get ahead of the rest.
Steve Williams CExP™, CMMA is a Partner at Incentica Business Plans in Calgary. He is a certified exit planner and mergers & acquisitions advisor with 30 years of senior management and executive experience. Steve has written over 130 business plans and succession/exit plans for some of the biggest best, including Fortune 500 companies. Steve is a Business School grad and Harvard educated.