Learning from history to navigate the choppy waters of recession and thrive

How many of you know how to run your business in a recession??

Grab a coffee and have a proper read of this, because whilst a recession is not guaranteed the lessons of the past give stark reminders between those businesses that failed and those that thrived.

Which will you be?

Interest rates have been increased to slow inflation, but this also increases the probability of a recession.

The economy shrank 0.1% in March and 0.3% in April. The Bank of England expect GDP to fall 0.3% in Q2. Two or more consecutive quarters of falling GDP is a recession.

The hope is that any recession will be brief and shallow.

History tells us that the average length of a recession is one and a half years with, the average fall in GDP 1.7% per annum.

Household disposable income is predicted to fall 2% this year, a large fall in the context of the last 100 years and one that is typically only observed during recessions and financial crises. As you will see below history suggests watching for the warning signs of recession.

So, what’s the impact of a recession?

A recession hits business confidence, it leads to lower turnover and lower profits. For some it will mean running out of cash and ultimately business failure or acquisition by competitors.

One benefit of a recession, would be the prospect of putting out the inflation fire.?

But the risk of “stagflation” is also possible, the coexistence of too slow growth and too high inflation.?

The likelihood of business failure increases dramatically during a recession.

Its also a time where kneejerk responses can have devastating and long-lasting effects on a business and employees.

It’s not all doom and gloom, honestly!

Each period of recession, 1973-1975, 1981-1982, 1990-1991, 2000-2002 and 2008-2009 were all followed by long periods of growth and prosperity.

Seen through the right lens, a recession presents an opportunity, it separates the winners from the losers.

A recession is the best time to acquire resources for the forthcoming growth period, all while your competitors are cutting back.

The challenge is navigating the choppy waters of a recession to thrive on the other side.

There are countless stories of businesses using the last recession to reorganise their business to drive profitability and efficiency.

Analysis by Bain using data from the 2008 recession found the top performing companies didn’t merely survive; their earnings climbed steadily throughout the downturn and continued to rise afterward.

Whilst the companies that stagnated, few had contingency plans and “when the downturn hit, they switched to survival mode, making deep cuts and reacting defensively.” They reacted too late.

So, what can we learn from history?

Watch for the signs - Most economic crises are predicted in advance. Yet many companies ignore these warning signs for too long, resulting in panicking and battening down the hatches (too late) as they try to steer the company out of dangerous waters.

Have a plan and stick to it – Making strategic decisions in a recession needs to balance the short term with where you want the business positioned post recession. Businesses that faired well changed their operations dramatically to come out on top of the recession, but this requires a good (and agile) plan.

Cash becomes ever more important - the availability of credit is limited, cash control and planning need more focus than ever before.

Don't have too much centralised control - Interestingly decentralised businesses fared well, they were quicker at responding to changing conditions and customer needs.

Don’t hold too much debt - Companies with high levels of debt are vulnerable as interest rates increase and less cash comes in to meet growing repayments. These are the businesses that tend to cut costs more aggressively, going too far and limiting their ability to bounce back during growth times.

Say no to slash and burn - Cutting costs too deep is a huge risk, recessions are relatively short lived, being best placed to ride the waves of growth requires a delicate balance.

Don’t have just one response - A focus solely on cost cutting sees a business approach every decision through a cost reducing lens, rather than learning to operate more efficiently. These organisations try to do the same with less, resulting in services of lower quality, leading to a loss of customers.

Don’t let the CFO slash budgets alone in a dark room - If cost-cutting decisions become centralised with the CFO and their team making cuts, little attention is paid to what should be kept to support post recession growth.

Act fast - Cutting costs quickly helps to offset the reduction in sales, it’s cutting the right things. The reactive nature of waiting for the recession to hit sees a painful hit to margins.

Don’t hope for the best and wait it out - The worst place to be in, those that think they can keep doing what they have always done.

Tread carefully with staff reductions - A loss of staff is inevitable, but the companies that emerged the strongest relied less on staff reductions and focused more on operational improvements to cut costs.

Time for a route and branch review of the business - Achieve operational efficiency by examining every aspect of the business to drive efficiencies on a permanent basis including what to divest from. The trick here is costs stay low when demand returns, allowing profits to grow faster than those of competitors.

Leaders need courage - For those lacking the courage to make acquisitions and investments, their businesses will struggle to regain momentum.

Get ahead of your competitors & expand where your competitors are cutting - Develop new business opportunities by making investments in R&D and marketing as well as taking advantage of depressed prices to buy property, plant, and equipment. This helps both during and after the recession by responding faster than rivals to rises in demand.

Seize opportunities - push through change, acquire customers from competitors, make strategic investments, and act opportunistically to acquire talent, assets, or businesses that become available during the downturn.

Conclusions

Prepare - Don’t assume you will weather the storm without preparation. The simple answer is the healthier your business is the more resilient you will be.

Don’t be on the back foot and wait for someone to say a recession has hit and then act. Waiting for the recession to start and then react leaves it too late, resulting in lost time, money and momentum.

Have a plan – It’s time for a full review of your business so you can make the right decisions.

Be ready to seize the opportunities as your competitors make the wrong decisions, be that buying their assets, taking their best people or taking their best customers.

Don’t slash and burn - History clearly shows the desire to slash everything is short-sighted. The actions you take toward the future in a recession are as important as the actions that you take to respond to a recession.

Focus on operational efficiency - Those businesses that reduced their costs ahead of the recession, and cut the right costs, were those that posted rapid growth following a recession.

Achieving operational efficiency

I’ve been a CFO a long time, spiralling inflation is one thing, but a recession is a whole new danger and through my research for this article, I’m not ashamed to say I learnt a lot.

Seeing the signs and taking action is a key theme of this article as is driving operational efficiency to take advantage of competitors reacting too slowly .

At this point you might be thinking you have nowhere left to look for savings or you don’t have the internal resources to maximise efficiency?in the time required.

That’s where my team and I can help.

Expense Reduction Analysts (ERA) are procurement and cost reduction experts, we work with small companies right through to instantly recognisable brands.

What makes us special, is our cost specialists who are all devoted to their specific area of expertise which means they can use their knowledge and buying power to rapidly?introduce you to new insights, suppliers, and processes to improve your business and reduce your costs.

Unlike other consultancies if we don’t deliver direct savings, there is no charge.

Leaders need courage during a recession, but you only know what you know and that's where external expertise can help.

If you would like to learn more about what we do for our clients then email me at [email protected] or book a call in my diary.