Economists are predicting that the next recession may hit within the next 18 months and that the U.S. isn’t ready for the onset. This is a serious problem, because a recession can wreak havoc on business owners – if not destroy it altogether.
Just look at the story of Lehman Brothers. Before the 2007 recession, Lehman was the fourth largest bank in the U.S.
Since its inception in 1850, Lehman had weathered many economic changes. The company survived the Great Depression, two world wars, and the near-collapse of hedge fund Long-Term Capital Management in 1998. But Lehman’s rush into the subprime mortgage market proved to be its downfall. To make matters worse, the bank paid little heed to the signs of the oncoming Great Recession. Lehman was still confident about the firm’s record revenues even in March 2007 as the market was beginning to collapse.
Five months later, as the credit crisis took hold, Lehman’s shares took a sudden dive. Throughout 2007, Lehman had underwritten more mortgages than any other financer, leading the firm to accumulate a portfolio of around $85 billion. In the fourth quarter of 2007, despite the cracks in the housing market, Lehman’s stock briefly regained buoyancy.
However, the company failed to cut back its mortgage portfolio while it had the chance, and it would never have the opportunity to do so again. On September 15th, 2008, the firm was forced to declare bankruptcy, wiping out more than $46 billion of its market value.
What is an Economic Recession?
An economic recession is defined as two consecutive quarters of negative economic growth. It is usually accompanied by a significant drop in the stock market, increased unemployment, and a slump in the housing market. Causal factors for a recession include:
- High-interest rates
- Reduced wages
- Reduced consumer confidence
Some recessions occur back-to-back, while others may occur up to ten years apart. Since World War II, recessions have lasted, on average, for eleven months each. A notable exception is the so-called “Great Recession”, which occurred towards the end of 2007 after the housing bubble burst and lasted for 18 months.
If you want your business to survive the next economic downturn, you need to make it recession-proof. Here are some ways that you can protect your company from tough economic times that may be coming.
Tips to Prepare for the Next Recession
1. Financially Prepare for a Downturn Before it Happens
Don’t wait for the first signs of a recession before you start to do something about it. By then, it may be much too late. If you don’t have a strategic financial plan, it’s time to get started.
Your strategic plan will help you understand how financially sound your company is today, so you can start saving to weather the next storm.
If you already have an updated financial plan, it’s time to start building a cash reserve. This may be the most important step you take. Start saving money in a bank account. Consider building enough reserve cash to cover at least six months’ worth of business expenses. This will help you to sustain your company, and the longer you can sustain your company through the recession, the more likely you are to survive in the long-term, through good times and bad.
2. Strengthen Your Customer Relationships
Your customer base is your greatest source of income. You can’t afford to lose them, especially during a recession, so make them your number one priority. Now is the time to make sure that your customer service is the best it can possibly be. This will give you a greater chance of retaining your current customers and attracting new ones, even during a recession.
Show your customers they’re a priority by adapting your products and services to better suit their needs, as well as offering them incentive programs. During a recession, it’s more important than ever to keep your customers loyal by providing excellent after-sales service.
3. Master What Your Company Does Best
When you’re preparing for a recession, don’t stray away from your strengths and start something new.
Diversifying your business is not necessarily a bad thing, even if your company is small. But adding on products or services just to try something new isn’t a good way to protect yourself from an economic downturn.
In fact, experimentation is actually making you more vulnerable. Focus on what your company does best and do it even better. This will ensure that you will have a stable foundation when the economy shifts.
4. Beat Out the Competition
Not every company within your industry is going to ride out a recession. Make sure your company is the one that does. You can do this by researching the competition and analyzing how they are outperforming you.
Implement stronger strategies into your business and hone them until they become second nature. Go beyond expectations and offer products or services that they don’t have on hand. During a recession, this will put your company ahead of your competitors in the eyes of your target market.
5. Don’t Let Marketing Fall Through the Cracks
It’s always good to review your marketing practices from time to time. If you’re expecting an economic downturn, it’s even more critical. Most companies will cut back on their marketing, creating an opportunity for you to gain more brand awareness and stand out from the competition.
Brainstorm with your team for new ideas to boost sales and maximize how you use your marketing dollars for the future. Identify your competitive advantage – what separates you from your competitors – and develop a unique selling proposition to push your company’s unique qualities. Don’t forget to make use of free marketing tools like social media and word-of-mouth.
These strategies will help to keep your customers loyal through a recession while ensuring that you are making the most out of your marketing budget.
6. Don’t Get Comfortable
Owners should constantly be checking their company’s progress to ensure that all processes are optimized. Just because you’ve been operating the same way for years doesn’t mean it’s the right way to do it now.
Technologies have evolved by leaps and bounds over the past decade. If you’re not already, explore more modern technologies and look for efficiencies. Streamlining your business with technology will reduce your expenditure and maximize your profits.
7. Maintain Good Credit
Maintaining good credit is crucial because down the road you may need to take out a loan to keep your business afloat. An unstable economy means it’s more difficult than ever to borrow money, so business loans – particularly for small companies – become incredibly hard to acquire.
If you maintain good personal and business credit, you stand a much better chance of being able to take out a loan when you need it most, and this could be the one factor that helps you make it through a recession.
Although it’s impossible to say exactly when the next recession will take place, it’s important to prepare now. Don’t be caught off-guard an economic downturn.
While nothing can guarantee your business will make it through a recession, strategic planning can help to give you a fighting chance and may help you keep your head above water while your competitors are sinking.
Start recession-proofing your business today so that you have the best chance of riding out the next economic storm.