“What goes up must come down”. Physicist Sir Isaac Newton was describing gravity when he made that statement more than three centuries ago. But it also applies to the economy, wherein a period of economic growth is at some point followed by a period of decline. Several months of negative economic growth is known as a recession, during which time a business’s survival may be at stake as unemployment rises, customers curtail their spending and earnings drop.
But when armed with a recession plan — designed when times are good and business leaders are thinking clearly — proactive companies can see their way through a downturn and even prevail.
What Is Recession Planning?
No one can predict exactly if or when a recession will occur or how long it will last. For example, the sudden onset of the COVID-19 pandemic in early 2020 sparked the most recent U.S. recession, though the downturn lasted just two months — the shortest one on record. Growing businesses can be hit disproportionately harder than their larger brethren, too, as was the case during the Great Recession between 2007 and 2009, according to an analysis by the Federal Reserve Bank of New York’s Research and Statistics Group.
But no matter how a recession plays out, preparing well in advance is key. Just like a cybersecurity incident–response plan maps out the steps a business should take in the event of an attack — as well as best practices, like awareness training, to limit exposure in the first place — a recession plan can help fortify the business to withstand tight times and even find opportunities during a recession. A preemptive strategy that clearly lays out the steps a business can take in advance of and during a recession can help the company keep the ill effects at bay and be ready for when the economy rebounds.
- Recessions are an inevitable part of the economic cycle; it’s better to plan for them when times are good than to be caught unprepared when a recession arrives.
- Two ways businesses can prepare for a recession are to build their emergency funds and reduce outstanding debt.
- A detailed recession plan lays out in advance ways the business can respond to multiple what-if scenarios.
Recession Planning Explained
If one thing is certain (aside from death and taxes), the economy will rise and the economy will fall. It’s important not to lose sight of an inevitable contraction. Understanding a recession’s warning signs — stock-market volatility, rising unemployment and declining sales, among them — and how they may impact your business are the building blocks of a sound recession plan.
Preparation should include brainstorming possible scenarios and how to handle them. For example, when should you cut back on operating expenses and by how much? What should you do if your biggest client goes bust? What if the recession lasts longer than you planned and you’re tight on cash? Should you apply for a business loan? What kind and from whom? A well-thought-out plan will also include trigger points, or metrics, that signal when it’s time to take action and what exactly should be done. For example, a slowdown in cash flow for three months could signal it’s time to reduce the workforce by a predetermined percentage.
Why Build a Recession Plan Before a Recession Happens?
It has been well documented over the years how stress negatively affects decision-making. Coming up with a recession plan when one is already underway and the pressure is on can lead to missteps and poor choices that could potentially hurt a business’s ability to withstand the economic storm. This speaks to why a recession plan is best made proactively, when the economy is growing and business is strong. Some businesses models seem naturally recession-proof, but with time on their side, business leaders can think clearly and strategically as they write out their plans and define roles and responsibilities. In addition, activities like building an emergency fund and keeping debt low need to happen prior to a recession, during profitable times.
10 Tips for a Recession-Proof Business
Preparing for a recession beforehand can make living through one a little less bumpy. Starting the process when times are good can help companies enter a recession in as strong a position as possible. Done well, a recession plan prepares a business to survive — or even thrive — during a recession, ready to grow again when the economy recovers. Here are some tips to consider.
Mind the budget. That means not only staying within your budget, but frequently reevaluating expenses to prevent overspending, reallocate funds and ensure a healthy amount is being saved. It may be time to pull back spending and adjust the budget accordingly. If you’ve weathered a few recessions before, review how you previously kept your budget in check and consider employing similar strategies.
Pay down outstanding debt. Revenue often decreases during a recession, which can make it tougher for businesses to pay off their own debt. If able, consider increasing payment amounts to lower your monthly bills before a recession ever hits. Doing so can leave you with more cash on hand each month, increasing your financial flexibility during lean times and maybe helping you sleep a little easier at night.
If you have multiple debts, consider their maturity dates and interest rates when deciding which one to repay first. It’s typically best to repay debt with the highest interest rate first. Refinancing is another option. Interest rates often fall in anticipation of or during a recession, so if the business has debt due within a year or two, refinancing it for a lower interest rate may be practical.
But holding on to old debt may make more sense if inflation is high. One effect of inflation is that makes the money you already owe “cheaper” than the real value of current dollars you’d use to repay it. In addition, interest rates rise during inflation. So the interest rates on your old debt may be lower than the interest rate on any new debt you incur. A thorough recession plan should account for different inflation/interest scenarios.
Beef up your emergency fund. Just as financial experts advise individuals to keep three to six months’ worth of living expenses in the bank in case of a hardship, such as a job loss, so, too, should businesses build an emergency fund. In a perfect world, a business emergency fund would cover expenses for at least six months. The time to save is when the economy is strong and cash is flowing in. Should business slow down — say, sales drop or cash-pinched customers need more time to pay their bills — the emergency fund can go toward paying employees and covering fixed expenses and other needs while cost-cutting and revenue-boosting measures are put in place.
Another idea: Consider applying for a bank line of credit, provided interest rates are favorable, that you can draw from, if necessary.
Cut back where you can. Numbers don’t lie. Recession planning should include myriad alternatives to lower expenses. For example, identify areas of your business in advance where you can save money without hurting operations. Discretionary spending is a good place to start. Business travel or perks like free lunches can go on the cutting board. Paid advertising can take a backseat to more organic options. Research alternative suppliers and their prices to have at the ready should you decide it’s time to switch vendors. But check with your current suppliers first: They may be more open to negotiating their prices, even if just by a little bit, in order to keep your business. Similarly, consider asking the landlord to lower your rent payment, or reduce the amount of space your operation needs to occupy.
Replacing long-term contracts for supplies and services with pay-as-you-go contracts is another cost-cutting measure. Also, consider ways to save by using technology and automation to boost productivity, whether for product manufacturing or back-end internal processes like accounting. Technology can free employees from handling routine matters so they can focus on increasing sales.
As a recession endures, there could come a time to trim employees’ hours or salaries. Layoffs could ultimately become necessary. Be sure to treat employees with respect, and you may be able to rehire them when the economy improves.
Determine where you can expand. This may seem counterintuitive during a period of cost-cutting, but if you have the funds, a recession can be an advantageous time to expand through the acquisition of plants and equipment, product lines and even entire businesses that are priced for quick liquidation. But there are other creative ways to expand. What new types of services or add-on items would appeal to your existing client base? For example, a cybersecurity software maker could develop a training course to teach cybersecurity awareness.
Diversification is another strategy. For example, if your law firm focuses on the insurance industry and the recession causes insurance companies to pull back, your business will undoubtedly be hurt, too. If it’s possible or practical to expand the business’s scope, consider targeting potential customers in a noncyclical industry that continues to do well during a downtime, such as health care.
Build your lead pool. Generating sales and marketing leads is at the heart of any growing business as it works to expand its customer base, yet it takes on newfound importance when a recession is approaching and customers rein in their spending. Ways to build your lead pool include proactively contacting existing clients about future business opportunities, asking existing clients for referrals, conducting social media and email marketing campaigns, attending networking events and even cold-calling.
Another way to build your lead pool is by creating high-value digital content of topical interest to current and prospective customers. Content types include articles, blogs, downloadable business guides and videos, to name a few. They can have a greater impact when they follow search engine optimization (SEO) techniques designed to help the content rank high on a person’s search results page. When times get tough, like during a recession, businesses want to know as much as they can. If your content can lead them to the right information, you’ve likely developed a lead of your own.
Plan for the long term. It can be difficult to see the forest for the trees during a recession, when managing the business day to day takes precedence over long-term planning. This speaks to the importance of devising a plan before a recession occurs and fear sets in. It also frees up time: to innovate, so businesses can lay the groundwork for new products and services to introduce once the economy improves; to revamp go-to-market strategies for better days ahead; and to research new markets. And even if finances are tight and purchasing ability is limited, stay apprised of emerging technology and equipment that could benefit the business down the line.
Assess your business’s risk tolerance. How comfortable are you about pursuing potentially profitable investment opportunities and strategic partnerships amid a volatile market? Can you tolerate the exacerbated risks and losses? The answer lies just as much in a business’s financial health, prospects for continued sales and the size of its emergency fund as it does in how conservative or aggressive its owners are. But bear in mind, not investing may also be risky.
“The competitive risk of not investing is the failure to retain a satisfactory competitive position for lack of investment. … A balance must be struck between the error of pursuing too many unprofitable investment opportunities as opposed to the error of passing up too many potentially profitable ones”, advised renowned business strategist and author Pankaj Ghemawat more than 30 years ago — advice that still stands.
Help employees build their skill sets. Another area to invest in — and make the most of during any business slowdown — is upskilling your workforce, be it software training, certifications, virtual courses or mentorship opportunities. Employees benefit from learning new skills and so does the business, in terms of associated performance and productivity gains, the latter of which is considered one of the main ways to combat a recession. In the event of layoffs, having fewer employees capable of more roles and responsibilities can also be advantageous to the business.
Plan for multiple scenarios. Many factors will be at play during a recession that may impact your business. Account for as many what-if scenarios as you can beforehand, along with myriad ways to respond, to minimize surprises. Each scenario can have multiple levels, too. Begin with contemplating, “What if?” Assess the toll different scenarios would take on your business and define the metrics, or trigger points, that would justify putting a recession plan in action. Each scenario can have multiple levels, too. For example, if sales fall 10%, perhaps you nix business travel and cut advertising spending by half. A 20% drop might lead to converting a defined portion of your workforce from full time to part time. You get the idea.
Recession-Proof Your Business With NetSuite Financial Management Software
The ability to evaluate and monitor your business’s finances is key to planning for a recession and standing strong during one. NetSuite Financial Management is cloud-based software that provides visibility into a business’s financial processes. It can quickly produce budgets and forecasts, model what-if scenarios and generate detailed reports on business performance based on real-time data. This insight can lead to more confident decision-making at a time when the economic landscape is uncertain.
Recessions are an inevitable part of the economic cycle. But businesses that plan in advance — when times are good and chaos doesn’t cloud their thinking — and put in place preemptive measures, like building an emergency fund, lowering debt and detailing how to handle multiple recession scenarios, will find themselves in fighting shape when a recession takes hold. For some businesses, a recession may even be a time of growth and investment, leading to better days when the good times return.
Recession Planning FAQs
Why is it important to have cash in a recession?
During a recession, revenue and cash flow often slow, making it more difficult for businesses to remain profitable and cover their expenses. Companies that have, over time, built an emergency fund can use that cash to continue operating until the economy begins to improve.
Who benefits during a recession?
Each recession is different. The recessions in the 1970s were caused by high oil prices. So companies that pumped oil out of the ground or provided services to those oil companies benefited. More recently, during the recession prompted by COVID-19, companies that benefited included the ones creating the vaccines, as well as product and service providers that catered to the remote workforce.
What products or services do well in a recession?
During a recession, nondiscretionary products and services, such as groceries, household items, health care, auto repairs and other essentials, continue to be in demand. They’re needed no matter what. People will typically curtail spending on the nonessentials, such as dining out and traveling.
How do you prepare for a recession in 2022?
Businesses can prepare for a recession by increasing their emergency funds, reducing debt and developing a recession plan that lays out the many possible financial scenarios and ways to handle each one. For example, what should you do if your biggest client goes bust? A well-thought-out plan — designed when times are good and business leaders are thinking clearly — will include trigger points that signal when it’s time to take action and what exactly should be done.
What is a recession plan?
A recession plan lays out a business’s strategies and tactics to prepare for and endure a recession.
What should you do during a recession?
Turn to the recession plan that you purposefully developed when the economy was thriving. Follow the steps you laid out in advance of the recession to withstand its ill effects as best as possible and be ready for when the economy rebounds. Importantly, try to remain calm and make level-headed decisions.