“Economists have predicted twenty-three of the last four recessions.”
This ancient joke has a bit of wisdom to it. We never really know, with precision, when the next macro-economic cycle causes an economy to shrink. As such, planning for a broad downturn is more a matter of corporate habit than executive finesse. Though industry cycles – at least in some industries, like semiconductors – are a bit easier to time, national and global business cycles are often accelerated or retarded by government policy.
This situation is more tolerable for giant corporations than small firms. The big dogs – with the market leadership, massive cash flows, endless forms of credit – have many more options for weathering down-cycles than smaller outfits. Though companies of any size need to prepare, being ready can be a matter of life or death to a smaller company.
It is the unpredictability of downturns that make near-constant preparation a necessity.
The Great Recession of 2008 – which was not a normal recession – is a case in point. Due to the near instantaneous chain reaction of corporate disasters, many companies were caught unprepared. A smaller company that is unprepared for even a mild cyclic recession can quickly cease to exist.
Preparing then becomes not so much an emergency process but a way of life. If one accepts the established reality that a recession will come someday, and a company conducts itself on a daily basis as if that day were tomorrow, then they are constantly prepared and cannot be taken by surprise. We keep fire extinguishers in our homes not because we are expecting a fire, but because we know they do happen.
In life and in business, it is wise to hope for the best but plan for the worst. If you company has a culture of rational frugality and doing whatever it takes to succeed, then you are basically planning for economic downturns.
What to prepare for
When the economy ebbs, your revenues go down, but your fixed expenses – rent, electricity, payroll – do not. You don’t need to be a math wizard to see that less income and steady expenses likely leads to negative cash flow. If the next recession last longer than your savings account, then you will either go under or go into debt. Since debt is a straitjacket you have to fight to be free from, neither of these options is good.
This can happen in good times as well. Many things can affect your profitability, from natural disasters (think tornados) to unnatural disasters (think lawsuits). The same mindset of constant corporate preparation helps you survive the inevitable economic recession as well as the unexpected calamity. If you lead a lean-and-mean machine, it will crash through these barriers.
How to prepare
Start by adding “rational frugality” to your corporate culture. This is not stinginess. This is the common-sense approach of questioning each spending request, primarily identifying those things that are necessary and those that are mere desirable. I ran a highly successful, publicly traded semiconductor company for 37 years. But my office was not palatial. Our factories were not new buildings. And my staff would politely gripe about not being on the newest version of Microsoft Office. But we were profitable 36 of those 37 years and survived several industry and global downturns while watching our competitors get acquired in fits of desperation, or watching them simply die.
A good rule of thumb to know if your rational frugality is adequately preparing you is how much cash you have in the bank. At a rock-bottom minimum, you should have enough to continue nominal operations for three months with zero income, and preferably nine months. When the economy suffers, customers slow down or even stop paying their bills. If you are depending on them paying you in a timely fashion to meet your obligations, your bank account could run dry waiting. If your employees are suddenly not getting paid, or our vendors are refusing to ship parts until you have paid them, even a short cash crunch can be deadly. And when all small businesses are rushing to the banks for bridge loans, you cannot afford to be in that line.
Watch but don’t depend on timing
There is an advantage to knowing when a recession is arriving. It helps you to lock-down various operations, finish projects that generate revenues, or even tighten your corporate belt another notch.
Interestingly, you can often do better at predicting a downturn by listening to your competitors than by listening to economists.
Your competitors are sensitive to the same factors that affect your company. Thus, they are sensitive to economic and industry downturns (and in many industries, there are downturns within the industry even when the rest of the economy is humming along). Changes in the rate of their press, their ad spend, and other indicators will show you if they are hunkering down.
The benefits of a downturn
Smaller businesses are always looking for advantages. One is to take advantage of downturns.
If you have been rationally frugal, have cash in the bank and can weather a recession, you are also able to continue operations and work on your next new product. If you do this during a recession while your competitors are struggling to just stay alive, then you come out of the recession like a bullet from a barrel. At the moment when the rest of the world is opening their wallets again, you are delivering the next thing they want or need. You gain new customers, delight old ones, and wow the market when your competitors are just happy to not be dead.
Prepare now and live it daily
Start now. Today. This minute. The next recession will come. Not likely this week, but eventually. If you are in that constant state of preparing for the worst, then unlike your competitors, you will be ready.