How To Recession Proof Your Business

Business owners (along with everyone else) have experienced a tumultuous time over the past few weeks. Despite Chancellor Jeremy Hunt scrapping almost all of the mini-budget delivered by former Chancellor Kwasi Kwarteng in late September, the latest reports show banks predicting that the UK will fall into recession by 2023.

Despite the usual media hysteria (in fact, arguably one of the best ways to recession proof your business and retain some sense of perspective is to ignore the news altogether) the coming challenges in the next 12-18 months do not mean all businesses are doomed to collapse. There are several ways you can recession proof your organisation to ensure you are in a position to survive and even thrive during an economic downturn.

Defined as two consecutive quarters of negative growth, recessions rear their ugly head roughly every seven to ten years. Therefore, if you are in business you are guaranteed to navigate your organisation through tough economic times.

In their 2010 HBR article Roaring Out of Recession, Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen discovered that during the recessions of 1980, 1990, and 2000, 17% of the 4,700 US public companies they studied went bankrupt, went private, or were acquired. However, 9% of the companies prospered, surpassing competitors by at least 10% in sales and profit growth. Similar findings have been found by researchers looking at how companies fared during the 2008 recession.

According to Bain & Company, what differentiates businesses that flourish in recessions and those that crumble is “preparation and alignment on strategy before the downturn hit(s)”.

“The CEOs and boards of the winners in our study had already done the hard work of defining their core competitive advantages and prioritizing the three or four initiatives that were central to executing strategy. Then, as the recession approached, winning teams laid careful plans for boldly taking advantage of opportunities that might develop under different scenarios. They doubled down on their core initiatives to maintain momentum into the storm. They created strategic wish lists of potential acquisitions and primed their M&A engines. They considered which stars to recruit as others faltered. And they made the tough decisions to streamline the business and trim noncore activities to raise the “currency” to pay for their bold ambitions.”

Below are four key ways to proactively position your business so it can succeed during and after the next economic downturn.

Invest in technology

Although it is tempting to tighten your spending, studies show that downturns result in quicker adaptation of innovative technologies. New tech can result in more efficiencies and transparency, concepts that are desperately needed during a recession. Technology can also be used to provide your management team with an accurate picture of how the business is performing and where operational improvements can be made.

Look at your employment strategy

People’s biggest fear during economic downturns is that the business they work for will make employees redundant to cut costs. However, during the 2008 recession, companies that relied less on layoffs and more on operational efficiencies to ride out the downturn fared better. This can be explained by two truths:

1. Hiring and training new staff is expensive, therefore, if you can retain all or most of your existing team, you will be able to direct the money you would have had to spend on recruitment into innovation and marketing when the economy picks up (and it always picks up), and
2. Redundancies crush staff morale, and this can affect productivity and the free flow of profit-making ideas at a time when such creativity is needed most.

There are several alternatives to making redundancies that you may be in a position to consider, including:

• Reducing hours
• Furlough
• Lower wages

You must ensure that any changes you propose that will result in altering the terms of an employee’s employment contract or a collective employment contract are agreed upon by all affected staff members. Failure to obtain employee consent is likely to result in Employee Tribunal claims.

Double down on your marketing

Any marketing and/or PR professional will tell you that there is a six-month lag between implementing a fresh marketing or advertising initiative and that initiative leading to increased revenue. Therefore, if you rashly slash your marketing activities in order to cut costs you will not notice the effect for some time, and then suddenly, the phone stops ringing. And unfortunately, it will take around six months or so to get traction on any new marketing activities and in tough economic times, this is a situation few firms can afford.

Maintaining your marketing and advertising efforts whilst your market rivals slash their spending will give you a competitive edge. Need proof? Look no further than the route Kellogg’s took during the Great Depression. It doubled its advertisement budget, especially in radio advertising and launched and promoted a new cereal called Rice Krispies. This led to the brand taking market share from its competitors and growing by 30% by 1933.

Monitor your debtors and cashflow

Insufficient cashflow sinks many businesses during a recession. You need to plan for the fact that your customers are likely to pay your invoices late because their clients are not paying them on time. One action you can take before a downturn is to create a cashflow forecast which will alert you to the money moving in and out of your business over the next 12 months. Understanding your cashflow will allow you to plan for things such as taking on new employees and investing in technology.

Keeping on top of your overdue invoices is crucial during tough economic times. Using a comprehensive debt recovery system that allows you to generate a Late Payment Demand or Letter Before Action quickly and cost-effectively will help keep your cashflow healthy and reduce the stress associated with collecting unpaid debts.

Concluding comments

There is little doubt that businesses will encounter challenges over the next 12-18 months. However, if you are well prepared, you will be in a position, strategically and financially, to take advantage of the opportunities that often present themselves during recessions.

If you have any questions regarding anything covered in this article, please call us on 02476 231000 or email enquiries@askewslegal.co.