Bracing for a Recession: What businesses can do to weather an economic downturn The last time the U.S. (and, by extension, the world) faced a major recession back in 2007. By the time economists called an end to the Great Recession, in June...

The last time the U.S. (and, by extension, the world) faced a major recession back in 2007. By the time economists called an end to the Great Recession, in June 2009, U.S. real Gross Domestic Product (GDP) had tumbled by 4.3-percent since its peak in Q4-2007. Unemployment was at 5-percent in Q4-2007, and rose to 9.5-percent in Q2-2009, topping-off at 10-percent by year's end. It was the longest recessionary period since World War II, and every sector of the economy felt its brunt. Now, looking back at how events unfolded then, including government responses to the crisis, and putting those responses into today's perspective, one can't help but feel a sense of deja vu!

Are We There Yet?

After trying to respond to the crisis, unsuccessfully, with traditional methods (interest rate cuts, fiscal stimulus, tax cuts), the Federal Reserve pivoted to a slew of nontraditional tools, including the large-scale asset purchase (LSAP) programs, and purchasing mortgage-backed securities (MBS) of Fannie Mae, Freddie Mac, and the Federal Home Loan banks.

Unfortunately, some analysts attribute the ensuing recession to some of these programs, which saw business productivity decline, while inflation steadily rose. Back then, there were a chorus of voices that advocated bolder action sooner; much like the voices we heard until recently about the current state of the economy. Back then, regulators sought to allay fears of the business community, much like we saw them do until a few months ago, with catch words like "transitionary", "not entrenched", and "temporary". Still, the official "party line" now, is: Nothing to be concerned about.

What Businesses Must Watch For

The frantic pace of interest rate hikes, by the U.S. Fed and major central banks around the globe, indicates that regulators now see similar headwinds approaching, as we saw in 2007. This time around though, it may be a good idea to watch the signs, and get ahead of things by planning for the inevitable (if/when it does arrive). Individual businesses must be proactive in planning for that (possible, eventual) turndown of the economy.

Here are some signs, that business leaders should watch for, that will provide an indication that we are well on the way to a downturn in the business cycle:

• Two consecutive quarterly declines in GDP
• A decline in consumer confidence
• Rising rates of unemployment
• Steepening of credit card and loan debt
• Slowing down of factory output

…and of course, growing recessionary chatter from government sources, with that familiar refrain: The worst isn't inevitable! Yet, there are those that differ from what regulators have to say. The Conference Board, a research and alternate policy advocate group comprising of large and small business members, for example, expects businesses to feel a great deal of pain in coming months, and offers this warning: "At present, US economic activity continues to expand, and the labor market remains robust, despite headwinds from inflation and interest rates. However, these forces are likely to significantly curb consumer spending and business investment over the coming quarters. Annual growth in 2022 should come in at 2.0 percent (year-over-year) and we expect growth of 0.6 percent (year-over-year) in 2023."

When business leaders see some of the signs highlighted above, they'll know that a recession is already upon us. However, by then, it might be too late for some small and medium businesses to do much to prepare themselves. So, are we there yet? Not quite…but it seems as though we are on that road! And, like any unwanted trip you undertake, a bit of advance planning can make the journey just that much more bearable.

Hope for the Best…Plan for the Worst

There's a lot of uncertainty in the business and financial system today, and when private sector and government planners say they're dealing with an unprecedented economic environment, they're not half wrong. But listening to consumers is critical for business owners when making their plans to weather a recession. Since consumers play a pivotal role in the fate of any business, it's vital to use consumer sentiment as the canary in the coal mime to predict bad times ahead.

And that's exactly what the Conference Board Consumer Sentiment indicators expect – bad times ahead. With consumers growing more pessimistic about business conditions, labor markets, and their financial prospects, it's time for businesses (and individuals) to get proactive and prepare for a possible (though not necessarily inevitable) economic downturn.

It's true that we have come through recessions and economic downturns before. However, the scale of what's coming might be more aggressive than we've seen in a generation. That does not mean every business is headed for bankruptcy…it just means it'll take some foresight and planning to weather the crisis and come out on top.

So, what can individuals and businesses do to weather the upcoming storm? Here are some tips:

1) Take Stock of Operational Plans

It's time to review your business plans considering what you might encounter in the not-too- distant future. If you have (or had) plans to branch out into new markets, cultivate additional product lines, or introduce a new service offering, revisit those plans with a recessionary lens. Will demand profiles remain the same as you expected? Are your suppliers expected to continue supporting you? Do you still expect to have access to the skills and expertise (employees, contractors, temporary labor) necessary to make those plans a success?

With economic and business indicator data in hand, including business cycle forecasts and predictions, take stock of those plans to ensure they're still valid. If not, revisit and revise where necessary – even if that means putting some of those plans on indefinite hold.

2) Review your Financial Plans

In the best of times, Cash is King! During times of slowing economic activity, however, Cash is a lifesaver! Review your financial plans from two perspectives – inflows, and outflows.

INFLOWS

On the inflows side, review your pricing structure for any opportunity to increase what you charge customers. Keep those increases "realistic", however, understanding that in a downturn, everyone (including your clients!) is looking to cut-down on spending. Make sure you don't give your customers an excuse to put your goods or services on the "don't need it" list!

If you have surplus assets or inventory, perhaps now might be a good time to dispose of them and divert the proceeds into your reserve fund. If you can convince customers to sign longer-term deals, albeit at slightly reduced rates, that'll bring some certainty to your inflows. Finally, keep an eye on government relief programs, if they're announced, and apply for them as soon as you qualify.

OUTFLOWS

There's an old saying that goes like this: A dollar saved is a dollar earned! Now's the time to scrutinize each line item in your expense budget, to try and cut or curtail that which you can do without. Three business news subscriptions might be an overkill. Can you do with one? How about switching to a less expensive business cell phone data plan? Promise your suppliers long- term contracts for lower rates. And…do the unthinkable: Trim your payroll.

If you have unprofitable product lines, or business locations that aren't sustainable, it might be time to close shop or discontinue them. With so many businesses closing down, landlords are desperate to hold on to dependable tenants. Is there an opportunity to negotiate lower rental rates?

3) Review your Invoicing Strategy

If you experience long wait-times between invoicing a client, and collecting your revenue, it's time to review your invoicing policy. In a financial downturn, the faster you collect your invoices, the more effectively you can use those funds. So, if you're experiencing slower-than typical collection cycles (perhaps your clients are also experiencing a financial crunch!), or if you are faced with higher-than usual bad debts or difficult clients, then it's time to review your credit terms.

One way to make collections less stressful is a strategy called Invoice Factoring. In effect, this strategy entails a business "selling" its invoice at a discount to a professional factoring service. Depending on how your factoring service operates, you get less than the invoice face value (say, 80%) up-front, and the balance – less a service fee – upon the factoring company collecting the invoice.

For example, if, in an economic downturn, you receive $4,000 of a $5,000 invoice (80%) immediately, and don't have to wait for 60 or 90-days to collect it – that's a plus. And, once they do collect the $1,000 balance, they'll remit a part of it (say, $850) and keep the balance (maybe $150 or 3% of the invoice value) as their fee. And that's not such a bad deal to assure you have a steady flow of cash coming in.

4) Pay Down Expensive Debt

To "tame inflation", governments are expected to unleash unprecedented interest rate hikes in the coming months. As they do, lenders will follow their lead, and that means your debt servicing costs will rise too. When doing a deep-dive on your outflows, pay special attention to expensive debt – such as mortgages and credit card loans. Use some of the savings from your trimmed-down expense, and some additional revenue generated from your inflows review, to pay down some of your debt.

Be mindful, however, that while expedited debt liquidation is typically a good idea, it might not be the right strategy for every business facing an economic downturn. Could you use that money more productively – for instance, to generate more business, or to meet next month's payroll?

5) Review Your Marketing Plans

If you haven't already embraced online marketing, now is the perfect time to do so! While many of your competitors and peers may have closed their bricks and mortar shops, and pivoted to an online-only model – perhaps you might not be ready to take that leap. Well, how about a hybrid marketing model? Or, maybe switch to "online first", which will still give you the option to revert to the in-store model if the economy turns around quickly.

Recessions and economic down-turns – either real or anticipated ones – tend to change customer profiles drastically. Is your current marketing strategy still relevant? Are you marketing to the right prospective client base – given that they too are likely feeling the pinch of an economic downturn? If not, then work quickly to market yourself to your new target audience.

Sometimes, survival during challenging economic times isn't about growing market share, but all about maintaining what you have. Instead of spreading your marketing dollars too thin, in the hope of capturing new customers, review who your current clients are, and offer them a value proposition for them to continue their loyalty to your brand: Special pricing for renewing their membership or improving the customer experience so you retain key customers. Reserved rates for long-time clients? Discounts for existing clients? Even a slight increase in revenue is welcomed during challenging economic times.

6) Beef-up Your Cash Reserves

Having a sufficient cash reserve is the last line of defense to weather economically challenging times. That's the war chest you dip into when you can't find other ways to meet your financial obligations. The most reliable way to build that reserve is to diligently set aside a portion of your monthly (quarterly) revenues for emergency funding. The issue with building the reserve, and maintaining it over the long-term, however, is that those funds are "off limits" for other operational purposes – purchasing inventory, buying-up a competitor etc.

One way to create an emergency fund is to speak with your financial institution and see if you qualify for a Business Line of Credit (BLoC). If you've been a good business banking customer for many years, with a spotless credit record, access to that line of credit may mean you don't need as large an emergency fund. This gives you more flexibility to use your reserves more productively, knowing you have sufficient credit as a fall back – if you need it.

Parting Thoughts

They say well-planned is better managed! And that's exactly what businesses, especially those in the SME range, must do – plan well to better manage a possible economic downturn. Review your business operational plans, take a good look at your financial plans, and go through every line of your income and expenditure plans. Where possible, cut-down on unwanted cash outflows, and defer (if not cancel) non-urgent spending.

It may also be prudent to beef-up your emergency cash reserves by resorting to innovative revenue-enhancing strategies such as Invoice Factoring. Getting qualified for a BLoC may also be a good idea. Even if you don't end up tapping into your credit line, the fact that you have access to additional funding sources makes weathering a recession – if it does come – less stressful.

One final word of caution: Planning and preparing for a possible business cycle slowdown doesn't mean putting a pause on all business activity. It also does not mean you shouldn't actively look for good opportunities that may present themselves. For instance, if the competitor next door is liquidating their business – for cents on the dollar – perhaps there's an opportunity for you to move in, even if it means taking on a little debt. This may be one of those times where you dip into your BLoC to make the most of a once-in-a-lifetime opportunity to expand your business, and grow future revenues.

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