According to a significant portion of the business press, the economy has been waiting to topple over for the last 12 months as the United States has emerged from the COVID era with inflation and rising interest rates, declining consumer savings, and slowing growth.
However, the predicted recession, the first since 2008, has not materialized, and maybe it won’t, but prudent management requires preparation for the distinct possibility. Recessions tend to gain force quickly once they begin, as businesses all at once shift from chasing demand to cutting costs. Companies that have already positioned themselves for a downturn will rebound faster and in better shape once hard times recede.
To trim the ship for rough waters, there’s one course of action that will almost certainly pay off: casting a bright light on internal operations. “Now is the time to get under the hood and examine the individual components of a business,” says Travis W. Harms, president of Mercer Capital. “Inefficiencies have almost certainly arisen during the post-pandemic boom. When times are good, managers tend to focus externally on generating revenues and delivering on obligations. It’s all too easy to let operations get a little bit flabby. Then, when the tide goes out, problems are exposed.”
No matter what the current condition of a business, a sharp eye will likely spot one or two internal segments clouding the overall picture. While the knee-jerk reaction to this is to cut costs, that too often retards future profits. A better course is to analyze the dynamics of any problem segments, then make adjustments to enhance profitability. Only if they seem unsaveable should they be eliminated.
Another important step is to raise operating revenue. “In a time of economic weakening, the key is cash,” says Anirban Basu, chairman & CEO of Sage Policy Group. “Cash can get you through anything.”
While there are many ways to raise cash, the balance sheet can offer some especially fertile ground. Accelerating the sale of stale inventory and extending accounts payable are proven tactics. Perhaps the most effective step is to accelerate the collection of accounts receivable, notes Harms. “Start calling folks who are past due.”
Reaching out to customers can bring a side benefit, says Sam Brownell, founder of Stratus Wealth Advisors. It helps build better relationships. “You get to know people a little bit better, and maybe you can work something out with them that strengthens your relationship going forward.”
One proven tactic is to repackage goods and services into bundles more closely aligned with customer needs. “There are very few products and services that come as is, without being part of a bundle,” says Oded Koenigsberg, deputy dean at the London Business School. “When we buy an airline ticket, we get not just transportation but also food, baggage handling, and service on the plane and in the terminal.” The same goes for your products and services. Can longer lead times be exchanged for lower prices for customers in need of discounts? Or free delivery for long- term purchase agreements?
Not all customers are created equal. Now is the time to assess the profitability of each. “Especially when heading into a recession, it’s important to rank your customers in terms of quality factors,” says Brownell. “We suggest making a list of customers in an Excel spreadsheet. Then start asking questions about each and rating them in columns.” Brownell suggests asking questions like these:
- Which tie up the least number of resources?
- Which are willing to be flexible if, for example, supply chain disruptions mean they can’t get exactly what they need?
- Which are the most loyal and pay on time?
- Which are the most price sensitive?
Rate each customer from one to 10 on each factor. Then figure out how to do more business with the customers who get the highest scores.
Underperforming fixed assets can be another source of funds. “It’s not uncommon for a business to accumulate non-operating assets during good times,” says Harms. Examples include vehicles, inventory, property, and equipment such as forklifts. “See if you have some stuff sitting in the back lot tying up capital, along with requiring payments for licensing and insurance and fuel. Maybe it’s time to sell it.”
While cutting too deeply can harm a company, some attention must be paid to reducing any expenses that have been allowed to grow too high during good times. “It’s good to focus not just on the amount of expenses but also the structure of your expense base,” says Harms. “Are your costs primarily fixed or variable? If the former, that is supportable when things are going well. But a recession is an opportunity to reconsider. Can you convert some fixed costs into variable ones, reducing your expense base accordingly?”
One example, says Harms, is real estate. “Do you have long-term leases you may not need? Is there a way for you to adapt a more flexible approach where you’re not being locked so much into long-term payments?” Renegotiating may mean more expense in the short run, but more management flexibility in the long run.
RETAIN TOP PERFORMERS
Brownell suggests taking a holistic look at your employees to make sure you’ve got the right people in the right places, and you know which are the critical ones to the operations of your business. “Who are your vital cogs? Who could you not get along without? Who are the people who can perform cross discipline tasks in the event of a reduction in force? Those are the people you want to shore up now, and make sure they feel valued, and they know that you’re going to stick with them.”
It’s more important than ever to retain your “A Players” in this tight labor market. “Given the talent crunch and the changing demographics, it’s really important to secure your talent base,” says consultant Brian Palisin. “Retention has been an ongoing issue for the last couple of years. You need to make sure you have a stable workforce, and that your company culture helps to retain your best people.”
Your top employees can be a source of innovation, of new ways of doing things and even cost savings. “People on the front lines see things that those in the front office don’t,” says Palisin. “So it’s important to solicit their ideas, empower them, and make sure they have the opportunity to contribute.”
Companies can also increase employee loyalty by being very clear on career paths within the company. Provide opportunities for people to find more value in their work and to move forward. And be honest with the challenges the company now faces. Acknowledge that there may be headwinds, and that there may be the need for some sacrifice, including foregoing bonuses or reigning in the company credit cards. “That kind of forward planning will make you feel more in control of the situation as opposed to just sitting there and getting buffeted by these exogenous economic factors,” says Harms.
The prudent company will also identify under-performers who might be let go when revenues decline. “During the post-pandemic recovery period, many firms staffed up massively in their efforts to chase demand,” says Basu. “But some of those workers have not been performing as well as one might have wanted. That’s the kind of worker that probably could be let go to help raise cash flow today to preserve fiscal health tomorrow.”
LOOK FOR OPPORTUNITIES
Successful enterprises see economic turbulence as an opportunity to solidify and increase their market presence. A close look at the competition can uncover opportunities that will strengthen a company over the long term. Is a market sector being abandoned by a competing enterprise? Finally, strong enterprises can take advantage of opportunities to absorb weaker ones, says Palisin. “For companies with strong cash flows and healthy financial ratios, it can be financially feasible to look into potential mergers and acquisitions.”
The key to success is to remain healthy during a recession so you can take advantage of the opportunities that arise when the economy recovers, says Josef Roberts, founder of E Squared Consulting, Atlanta. “The most successful companies in a downturn will be those that execute the best.”