Strategies for business resilience in a recessionary climate
by Jay JungMr. Jung is the founder and principal at Embarc Advisors and has nearly 20 years of experience in Corporate Finance. Visit https://embarcadvisors.com.
Few developments are as unsettling for business leaders as a recession, as the economic slowdown that occurs both before and during one typically leads to lower sales and declining revenues. As a result, the adjustments that businesses make to stay solvent can slow growth and innovation, and when recessions linger, business failures are common.
As 2023 comes to a close, experts are divided as to whether or not the economy will slide into a recession. Inflation is cooling, which is typically a sign that a recession is not imminent, but interest rates sitting at a 20-year high is not a good sign.
In response to the uncertainty, many CEOs have decided to prepare for the worst. The following are steps that business leaders can take to make sure they won’t be caught off guard if economic conditions deteriorate.
Each day brings new media reports about the possibility of a recession. Some are rosy, such as recent reports saying the US Federal Reserve’s decision to leave interest rates unchanged should fuel optimism about the economy. Others, however, are troubling, like other reports claiming 323 years of economic data indicate that a recession is likely.
Overall, the contradictions in the media can leave any business leader confused. Yet, rather than turning to the media, business leaders can learn to track for themselves the indicators that signal a recession.
One of those indicators is the Gross Domestic Product (GDP). A consistent decline in a nation’s GDP is a primary indicator of a looming recession. Here are a few other signs to which business leaders should pay close attention:
- Unemployment rates: When these are on the rise, they trigger the type of economic hardships that accompany a recession.
- Reduced consumer spending: This sign, which typically begins with non-essential expenses, can also point to an approaching recession.
- Stock prices: Rapid and extreme fluctuations in prices result from investor fears that may indicate conditions are rife for a recession.
An inverted yield curve is one indicator that many experts point to as a precursor to a recession. This occurs when short-term bond yields are higher than long-term yields, which is not the norm.
Certain governmental activities can also be viewed as signs of a recession, including a shift in interest rates, which central banks will implement in an attempt to stabilize an uncertain economy. Initiating economic stimulus measures can also be a sign that the government is worried about a recession.
Economic activity in foreign countries should not be overlooked by those looking for signs of a recession. National markets have become increasingly connected to the global economy, which means a recession in one location can have a domino effect. In addition, trade tensions or other geopolitical activity can disrupt supply chains and cause negative economic fallout in any number of countries.
As any of these signs are detected, businesses should take the time to explore their potential impact. If indicators begin to stack up, businesses should be ready to quickly transition to preemptive measures.
Financial resilience is crucial for business — regardless of season. This is why it not only helps exponentially to manage unplanned costs, such as lawsuits or supply chain disruptions, but it also empowers businesses to pursue new opportunities that arise unexpectedly.
When a recession hits, financial resilience is especially important. It provides businesses with the resources that are needed to stay viable despite flagging sales or plummeting profits. In many ways, it acts as the safety net that keeps businesses from failing.
Liquidity management is one step that businesses can take to increase their financial resilience, which requires managing working capital in a way that allows businesses to have more assets than liabilities. Efforts to manage inventory efficiently and limit the amount of credit that is extended can both increase liquidity and lead to better financial resilience.
Debt management is another important aspect of increasing resilience. Ideally, businesses will pay down high-interest debt prior to a recession, but when that is not possible, they may instead seek to renegotiate loan terms to preserve capital for a recession.
Maintaining regular communication with lenders can also be helpful as a recession approaches. Being honest about your financial situation and its potential impact on your debt can lead to more favorable relations with a lender if you are unable to meet your obligations. Keep in mind that lenders will also want to reduce risks of financial loss during a recession, which could inspire them to renegotiate loan terms.
Diversify Your Client Base
A recession’s impact can vary from market to market. Consumer discretionary goods, for example, are typically the first to feel the pinch. As a result, businesses that focus exclusively on one market can find themselves impacted more dramatically during a recession than those that diversify.
Expanding the type of products or services you offer can help your business maintain a revenue stream during a recession. This can include offering complementary services that are less discretionary, such as an electronics retailer offering repair services or a bank offering debt counseling and wealth management services.
Expanding products and services can also involve launching into a completely different market segment. There are a number of industries that have shown to be “recession-proof” in the past, including discount retail, information technology, and comfort food. Launching a new line of products or services that connect with recession-proof industries can create a highly resilient revenue stream.
Businesses can also achieve diversification by expanding into a new geographic area. Offering products or services internationally can provide revenue streams if the US is affected by a recession.
Technology can play a key role in diversification. For example, leveraging technology to empower e-commerce can help a business expand into new markets, such as technology that utilizes artificial intelligence. This can help businesses analyze data in a way that identifies opportunities for expansion.
Even if a recession ultimately fails to materialize, efforts to become more diversified can make a business more agile. By exploring new markets and experiencing what it takes to enter them, employees can learn the skills necessary to take advantage of expansion opportunities.
Focus On Customer Needs
Recessions typically lead to reduced consumer spending. However, consumers will always have needs they must meet, and the businesses that track those needs will have the information they need to pivot into new revenue streams during a recession.
Adopting and implementing customer-centric strategies can be especially helpful for businesses that are preparing for a recession. Such strategies focus on soliciting ongoing customer feedback to ensure that products and services can be adapted to meet new needs. As shifts in the economy change consumers’ spending patterns, customer-centric strategies allow businesses to understand what is causing the shift and update products or services so they continue to provide value.
In some cases, customer feedback can indicate that it is prices — rather than products — that need to be adjusted. Businesses that adjust in response to such feedback can retain loyal customers even if they only commit to short-term changes.
No business can stop a recession, but any business can prepare for one. The key is seeing a recession as a problem that can be solved. By identifying the signs, developing financial resilience, diversifying business offerings, and staying focused on customer needs, businesses can position themselves to endure the economic impact of a recession.