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How to Proactively Recession-Proof Your Business

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The onslaught and massive outbreak of Coronavirus causing COVID-19 in the last two months has caused the world to turn upside down. Economies have tanked and the DOW has seen the most highs and lows since the 1930s. In this blog, we provide a breakdown to support:

    • The current state of affairs given COVID-19
    • Key things we learned from the great recession and what we can apply today
    • The official definition of a recession and are we headed there?
    • And 10 tips to consider to get through this and come out on the other side

Prior to COVID-19, Economists around the world had been warning that another recession was possible in late 2020. Along with those warnings, there have been many articles to suggest businesses should start preparing given the looming economic downturn. While Economists might feel somewhat vindicated, most (if not all) were definitely not prepared for a downturn of this magnitude.

To say that a coming recession wasn’t written on the wall would be inaccurate. Forbes reported back in January that there were causes for concern for 2020 being a recession year. The two significant indications cited included:

  • an inverted yield curve in 2019
  • slow growth in the manufacturing industry

When on the lookout for a recession, the unemployment rate is another major area to consider. In February, the U.S. Bureau of Labor Statistics noted the unemployment rate was at 3.5% or roughly 5.8 million people.

The Los Angeles Times just recently reported in late March 2020 on California’s numbers citing, “The state’s Employment Development Department processed 186,809 claims for unemployment benefits last week, up from 57,606 the week before… The total last week was 363% higher than the number of claims processed during the same week last year.”

In an article from March, Forbes reported that this is the quickest peak to bear market in history. The decline only took a record 22 days.

With all of these statistics and influx of information coming to light, indicators make it seem that the United States is on its way to entering another recession. However, it requires two consecutive quarters of economic decline to meet the technical definition of a recession, and only the experts can officially declare we are in one.

With what seems like mostly all bad news, we wonder if there is anything hopeful we can latch on to for the future?

International Monetary Fund Managing Director, Kristalina Georgieva, released a statement following the G20 Ministerial Call on the Coronavirus Emergency where she said, “First, the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021.”

If we know going into this period that there is a light at the end of the tunnel, we can have the stamina to survive. Looking back at our last recession can provide some learning lessons too.

What We Learned From The Great Recession

Remember 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.

The greatest thing Lehman Brothers ever did was go through this experience to be a learning lesson for future generations. We can confidently say, don’t be like Lehman. Take actionable steps now for the oncoming recession to protect the future of your company. The first step is educating yourself and the other financial leaders of your company on what an economic slowdown truly means.

What is an Economic Recession?

As we mentioned earlier, 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. Some factors for a recession include:

  • Falling interest rates
  • Rises in bankruptcies, defaults, foreclosures
  • Falling assets and dip in stock market
  • Reduced wages and rising in unemployment
  • Reduced consumer spending and 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 was the so-called “Great Recession”, which occurred toward the end of 2007 after the housing bubble burst and lasted for 18 months.

Fast forward to today, and we are faced with what individuals are already considering a recession. Technically, the committee who decides these matters could not formally state we have hit a recession until two quarters have passed.

Until then, we must consider how to forge ahead of this impending hardship. If you want your business to survive the next economic downturn, you will need to take tangible steps to make it recession-proof. Here are some ways you can protect your company from tough economic times that may be coming.

10 Tips to Recession-Proof Your Business

So, with a recession on the imminent horizon, where does that leave businesses today? Planning for your company’s future seems impossible in these times of uncertainty. What we do know is that an economic recession can wreak havoc on business leaders, companies, employees, vendors, and customers.

These are the ten tips our team of experts has compiled to help you navigate through these uncertainties:

1. Financially Prepare for a Downturn Before It Happens

Whether now or in the future, 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 one.

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 crucial step you take. Start saving money in a bank account. Consider building enough reserve cash to cover at least six months’ worth of essential business expenses. Doing so will help you to sustain your company, and the longer you can maintain your company through the recession, the more likely you are to survive in the long-term, through good times and bad.

And if you’re unable to do this now, keep reading below.

Read More: Download our Strategic Budgeting eGuide

2. Develop a 13-Week Cash Flow Forecast

When faced with the unknown, the best way to set your company up for success is with an actionable plan. The critical steps here are to understand where your incoming cash is coming from, how much of it you are receiving, and how it is spent.

Having a grasp on this information can help to visualize the future from a cash perspective. Creating a 13-week plan will allow company leadership to account for all money, make adjustments where needed, and see where to adjust strategically. Be sure to review this document weekly.

Read More: Part 2: Actionable Advice from Our Founder to Improve Your Cash Flow

3. Scenario Planning

Preparing for an uncertain future is possible with tools like scenario planning. Taking a few different visions on what your company’s future could look like enables you to think through those possibilities and understand which outcome best sets up the business for success.

The three main scenarios to plan through would be the original plan, the probable plan, and the worst-case plan. As a business leader, working through each of these scenarios can bring forth thought driven data that should put forth solutions better than any reactive, gut feelings you might have during stressful situations.

Read More: Your Guide To Financial Modeling and Scenario Planning

4. Talk To Your Bank Today

Taking control of your finances today might be the single most crucial step you can make for your business. By proactively communicating with your banker and setting up a conversation with them, you are illustrating that your company is reliable.

You will first want to stay informed on how the bank currently views your business in three areas.

Ask which loans have been downgraded and what industries are being impacted the most. Is your sector secure or not? Honest conversations like these can help you understand how the bank will treat you going forward.

Ask about your business’s risk rating. If the bank decides to downgrade your loans, they will receive a higher risk rating, which ultimately means the bank will try and pass along costly expenses to you if you’re forced to leave the bank.

Read More: Planning and Managing Your Banking Relationship During COVID-19

In that same vein, you will want to maintain good credit. If you are asked to leave the bank and need to find another one, a high credit score is essential to borrow money. 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.

5. Know Your Liquidity Options

One of the most important aspects of your business is its liquidity. It’s critical for paying employees and company bills, but it’s also crucial if you are conducting scenario analysis to help with decision making at your company.

There are many options to choose from when it comes to freeing up liquidity. Your best bet right now is to take advantage of special government programs that have been developed during the COVID-19 outbreak. Other options can range from alternative financing solutions, to using business assets, or even considering private equity investors who can give you cash in return for a partial stake in your business.

Don’t be afraid to think outside of the box and to negotiate for the best possible terms and options. To get ten more liquidity tips, be sure to check out our recent blog below.

Read More: 10 Liquidity Options for Businesses During COVID-19 Outbreak

6. Communicate With Your Vendors

With the current state-of-affairs, we do not know when things will get back to “normal.” If you’re lucky, your business and customers have not been affected at all by COVID-19. What’s more likely is you have. The question to be asking is, how has the Coronavirus impacted your company?

The only way to answer this question is through communication with your vendors and your customers to be sure your cash-flow is not compromised. Start by reviewing your contracts, then talking to your clients and customers. Analyze where the risks are and make decisions from there.

Obtain a full understanding of the bigger picture and create a strategic plan to maintain positive cash flow.

Read More:  The Importance of Proactive Communication & Talking to Your Vendors In This Crisis

7. Strengthen Your Customer Relationships

Your customer base is the most significant 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 be. This will give you a higher 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 suit their needs better, 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.

Read More: Determining Profitability Within Your Business: Analyzing Profits by Employee, Product and Customer

8. 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.

Experimentation is making you more vulnerable. Instead, analyze the industries of your customers. If you have a decent number in recession-resistant sectors, focus on catering to their needs. How can you save them money, or even better, time? Can your services alleviate something on their plate that will give them peace of mind knowing you are handling it?

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.

Read More: Challenges of aggressive growth and how it can destroy your business

9. 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.

To gain a lead on your competition, you will first need to research them. What areas are they outperforming you, and how can your company step up to the plate? Doing your research now can save your business in the long run.

With your out-of-the-box thinking, you may need to bring in the help of some automated software to help you drive more leads. Spending a little money now can help secure an active pipeline of good prospects in the right industry to carry you through the recession.

Implement more robust 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 an economic recession, this will put your company ahead of your competitors in the eyes of your target market.

10. 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.

In a recent article from Entrepreneur.com, the idea of perfecting your copywriting was a critical aspect of upping your marketing game. As more remote work is being implemented to cut down on social distancing, more individuals are looking for research and data on the novel Coronavirus. This creates an opportunity for your company to leverage its marketing materials, copy on the website, advertisements, and social media, and gain more engagement from your audience. Persuasive copywriting is the only way this can happen.

Brainstorm with your team other 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.

Another idea is to productize service-based businesses. If you’re a service, identify how to productize some of what you do. Keep things simple to start and pick one area of focus. Products come in all shapes and sizes, from digital SaaS products to courses, to e-books, to anything that can be purchased and paid for online. Products can bring in additional sources of revenue, and if the customers are happy, they can drive word of mouth sales as well.

These strategies will help to keep your customers loyal through an economic recession while ensuring that you are making the most out of your marketing budget.

11. Bonus Tip from Chief Outsiders

Chief Outsiders recommends launching new offerings to help capitalize on delivery services to your clients in fresh ways. This could be through virtual offerings, digital assets like teaching, training, or coaching, free or limited subscriptions, or other services you can provide. Finding unique and creative ways to meet your clients where they are can keep your business on their mind while supporting them in their new work environments and compiling with government-mandated behavior.

Final Thoughts

Although we can’t be 100% certain that the Coronavirus will lead the US into a proper recession, it’s essential to prepare now. Don’t be caught off-guard in the event of 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 may sink.

Need help taking the steps to recession-proof your business? Our team of experts can help! Contact us when it is most appropriate for your organization, and we can help give your company a fighting chance to ride out the looming economic storm.

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