We are experiencing a period of uncertainty in our lives, the likes of which have never been seen before. Coronavirus pandemic has upended our lives. There are no fixed answers. No structured institutions or established routines or a magic wand to make all this go away. We are challenged at a level that is forcing us to introspect on a deeper level.
The first signs of the economic fallout from this are becoming evident. From global manufacturing giants to the humble household. From sprawling warehouses to gleaming corporate offices, demand is plunging everywhere. They are driven by reduced spending, which in turn is driven by the loss of jobs.
With social isolation, lockdowns, forced quarantine becoming the new regular, economic activity across the globe has come to a grinding halt. Specific industries like production, travel, hospitality etc. are facing challenging and uncertain times more than the others. Top economists are of the view that a recession is upon us.
What is a Recession?
Recession is a period of reduced economic activity. Either in a full geographical area or a much smaller area. It affects all the sectors of the entire economy. Some of the telltale signs of Recession are reduced demand, production, manufacturing, and loss of jobs. Reduced budget for marketing, operations, sales, channels are the norm. Plunging stock market, and a loss of investor wealth in various financial instruments are common in Recession. Recession forces a business to reduce costs, seek ways to conserve capital, and put a lid on spending.
For any business to succeed, there are particular best practices or golden rules. They don’t guarantee growth or success, but it promises a level of sustainability and potential for growth.
For example, having a vision, doing competitor analysis, being innovative (or at least trying!), sacrificing, being innovative, etc.
The same is the case with Recession proofing a business. There are no guarantees to ensure survival in a cyclic business downturn. Most of the time, companies resort to the standard practice of cost-cutting to improve cash holdings, achieved through painful processes like laying off people. But this is not the only way of beating a financial crisis. By staying ahead of the curve and planning and preparing an organization for darker times, a business can significantly mitigate the risks and uncertainties with recessions.
Stress Test/SWOT Analysis
The more you sweat in peace, the less you bleed in war.
Recession proofing of a business should begin when there is no recession. It requires tremendous foresight and vision to envision a dark future and prepare for it. The human tendency is to avoid taking uncomfortable actions. Irrespective of that, organizations should conduct a stress test or SWOT analysis to understand where the company stands, particularly during a boom period. An in-depth analysis of the workings & the state gives insights into the preparedness of an organization.
- How much is the cash reserve?
- What is the daily, weekly, monthly cash flow?
- If the highest revenue-generating account is closed today, what would be the immediate consequence and fallout of that?
- Which departments/functions are generating maximum RoI?
- Which department/functions are bleeding?
Based on the findings/audit, management can do course corrections and take corrective actions. Introspecting in such a manner, companies become proactive than reactive. This helps an organization to be ready for an actual recession.
Cash flow, Recession fund
The three most dreaded words in the English language are ‘negative cash flow.’
As with personal finance, disciplined cash management practice goes a long way in helping an organization survive a downturn. Cash management is something an organization has to define and practice in its work culture. The line between available excess cash and the reserve fund is thin and varies from organization to organization. Having strong liquidity improves credibility, which in turn helps during the downturn. Some of the ways by which cash flow or cash holdings can be improved are by having different modes of payment. Other methods include reduced prices upon prompt payment, dispatching invoices ASAP.
Similarly, constant evaluation of customer creditworthiness helps in reducing debts. Periodic evaluation of operating expenses, leasing-renting over purchasing, and many more. Reducing debts and keeping a good credit rating helps in raising cash reserves from potential investors. The exact methods vary from business to business, but the underlying theme is to always focus on positive cash flow and to build a corpus fund specially marked for economic downturns.
Rekindle the customer relation
Customer service shouldn’t just be a department, it should be the entire company.
The most prominent advocates of a brand are its customers. That’s a no brainer. A business might spend millions of dollars on a rockstar or starlet endorsing its products. Still, nothing beats the right word put by a customer to a potential customer. Since the endorsement comes from trust, customer feedback or approvals are the key to a business surviving. During a downturn, more so. Just like your organization, a customer might be going through a downturn himself. Personally or at an organization level. Find out how they would like their products and services better served, put yourself in their shoes and reimagine different, better and effective ways of providing services. A knee jerk reaction would be to reduce marketing budgets during a crisis. Still, effective marketing is always required irrespective of the downturn. This helps in spreading the word about your product and service and helps win new business.
A restructuring of an organization is always a difficult time and delicate.
The best part of a downturn (Yes, such a thing exists! ) for a business is, it forces an organization to look inwards, which is long overdue. All too often, the bottom line and sales figures take up the entire vision. It’s easy to lose track of how an organization reached there. In the journey leading up to this stage, a business inevitably ends up bloating across entire divisions.
E.g., Stale process, unnecessary holdings, unused inventory, multiple threads of hierarchy, unnecessary expenditure, expensive way of execution when a cheaper alternative is available, etc.
All end up dragging an organization in unseen ways. Internal restructuring of an organization helps in weeding out all these. By restructuring the organization internally, new ideas, products can be conceived, which in turn drives growth. An organization is thus able to trim down and handle the downturn effectively.
Quality means doing it right when no one is looking.
Finally, there is no substitute for a good quality product or service. Granted, that is not the only thing required for a successful business. But if there is a constant variable in the entire equation of business, then that’s quality. There is no substitute for that, and there is no compromise on that. A game-changing, good quality product or service will survive any rough weather. A good quality product builds an enduring brand that outlasts any economic cycle. Focussing on quality should be in the DNA of the company. Adaptation of Technology is an essential way of putting quality in the center of your business. By staying committed to quality even during downturns, a business earns the trust and in turn goodwill of its customers
Recessions are part of the cyclic nature of business. Maybe Its effects can be mitigated. Perhaps its onset can be delayed. Its impact can be reduced, but it’s inevitable. A combination of strategies like avoiding wasteful expenditure, smart spending, lean and trim organizational processes, and reduced debt are proactive steps to shield an organization from an economic downturn. Having an ear to the ground and continually innovating helps an organization to stay ahead of the curve. The key is to be proactive and smart. As an ancient proverb says.
The best time to plant a tree was 20 years ago. The second best time is now