Entrepreneurs

How Your Company Can Prepare for the Recession

Nobody wants to be the bearer of bad news, especially in the early part of a decade already riddled with it. We’ll let The New York Times do that. This week, they asked, “What’s the chance of a recession?” The answer from economists, analysts, and strategists, was frank: the chances are “uncomfortably high.” 

Has the recession already started? Will it start in the next month? Will it start next year? We don’t know everything. But the answer to one of those questions is yes. And a better question is, what can we do about it today?

We can take comfort knowing this one will be different from the last; few saw the pandemic crisis and its economic ramifications coming. Company leaders were understandably ill-prepared. But right now, those same company leaders have a precious opportunity. There’s still time.

The first step is to accept the reality of the forecasts–no excuses for a lack of preparation. Look at the leading economic indicators:

  • Stock Market is in clear bear territory, with no indication of changing direction
  • Inflation is rising at a record pace, driving higher interest rates
  • U.S. debt levels are at unprecedented levels
  • Retail sales have begun to fall, with giants like Target and Walmart dropping precipitously

Next, don’t panic. For that matter, ensure your employees don’t panic. Demonstrate your control of the situation by listening to them. Don’t underestimate their level of concern–likely they have less financial reserve than you do. Envision a kitchen table gathering of the family on the farm, in a rough crop year. Lower resources often promote an environment of individualism, so this is a time to be thoughtful, generous, and candid. It’s time to clearly communicate challenges and get everyone hefting their weight in the same direction.

Every employee’s focus should shift from the income statement to the balance sheet, or more precisely, from profit generation to cash. You want your entire team thinking of ways they can conserve or generate cash. (Running out of cash is the most common way private businesses fail.) The game is over when you don’t have enough cash to make payroll.

You’ll need to generate your own list, but items on it might include:

  1. Sort your customers by profitability. Focus your efforts wholeheartedly on customers at the top of that list. There’s a good chance you’ll eventually have to compete more aggressively for all customer business and having higher profit margins will enable you to reduce prices and still generate cash. This Inc. article may be helpful: “Finding Your Company’s Profitable Purpose
  2. Make it plain to employees that your priority, and theirs, is to get through the recession with no layoffs. If you don’t sincerely mean this, don’t say it. But it’s not just the right thing to do–it’s the profitable thing to do. Companies who commit to their employees in hard times have a level of ongoing loyalty and engagement that competitors can only dream of. Three good examples are found in this HBR article, Run Your Business So You’ll Never Need Layoffs. We know quality, engaged workers improve outcomes like profits and sales, reduce costly turnover, and drive repeat and referral business. In other words, they improve the economics of the business again and again.
  3. Limit purchases to those critically essential to keeping the business alive. Prices for everything have been rising, but they’ll likely be lower in a few months. Wait it out. Interrogate and minimize anything that consumes cash, including inventory, repairs, expansion plans, acquisitions, etc. This won’t be painless, but even a little cash could mean the difference.
  4. As your market tanks and orders shrink, keep matters in perspective. Remember the story of the two men in the woods? When a hungry bear comes to camp, one man laces up his boots and prepares to leave the tent. Lying on his cot, his friend says, “You can’t outrun a bear.” The first man turns to leave, remarking, “All I have to do is outrun you.” You and your team will have to lace up your boots, but you don’t have to outrun the bear. Identify your strongest competitors and figure out what you can do that they aren’t doing. If can you outlast them, you can pick up their customers too.
  5. Develop a cash-conserving contingency plan in case things get dire. This may involve temporary reduction in compensation. Anthony and Elizabeth Wilder, owners at Anthony Wilder Design Build (AWDB) used this route to see their company and people through the financial crisis of 2008. In their case, front line employees took a 20% pay cut, managers agreed to a 30% cut, and the Wilders took a 50% cut, leading by example. They tracked the forgone pay and set it aside, with a commitment that these accounts would be paid in full before the company gave any future bonuses. 18 months later, that commitment was fulfilled.

The untold story of AWDB is that one front line employee came to the Wilders when the contingency plan was taking effect. He asked if his pay could be reduced by 40% so that one of the younger employees would not have to take any pay cut. He said, “Paul and his wife just had their first child. They really can’t afford to live on lower wages. I can.”

The owners agreed. They’d already created a team environment by treating their employees like partners, not hired hands. And in hard times, individualism isn’t the path to survival. Hard times are coming. We depend on each other to thrive; we can depend on each other to survive.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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