Recession proof your business in 5 savvy ways

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How to recession proof your business?

At the time of writing in May 2020, many economists believe we are entering a new ‘recession’, with some predicting that we are actually entering a ‘depression’ that could eclipse that of the Great Depression of 1929 – 1933.

As a business owner or executive, what can you do to weather the storm during these turbulent times to protect your sales revenue, profit margins, and the job security of your valued employees?

I have studied this subject intensively during my career and hope to help you in the coming paragraphs to recession proof your business.

If you would like to see a short presentation detailing why I believe we are entering a new recession given the Coronavirus Pandemic at the time of writing this article, then view the slides below:

Economic recession in 2020? 3 factors that explain the answer from Philip Mazloumian

First, some context about economies and money

Before I can guide you how to recession proof your business, first we need to establish a clear understanding of what an economy is, the factors of production and the medium of exchange typically used.

An ‘economy’ means a collection of households, businesses and government entities within a specified territory that can be as micro as a single town, or as macro as an entire continent.

The consumers and businesses that comprise an economy continuously exchange products and services for some measure of value referred to as money, whether it’s someone buying a gallon of milk, or a government department hiring a contractor to build new roads, the value of all these exchanges comes together to build an ‘economy’.

Ray Dalio has produced a great video to explain the mechanics of an economy here

Currently, modern society uses currencies such as the US Dollar, the British Pound, the European Euro etc to represent ‘money’, but on a quick (but very important) side note, although we generally refer to our currencies as ‘money’, fiat currency is NOT actually money by its proper definition.

I recommend you watch this video if you want to learn more about the difference between ‘fiat currency’ and real ‘money’.

I also recommend a great book on this subject titled ‘Economics Explained’ by Robert Heilbroner and Lester Thurow, but ultimately, by understanding how households, businesses and government entities exchange value with each other, you can better position yourself to recession proof your business.

And here’s some context about recessions and depressions

During recessions and depressions, the thousands of households, businesses and government entities that comprise local and global economies typically see a decrease in ‘demand’ and therefore spending (consumers buy less).

As a result, production of products and services by businesses naturally need to decrease to be in-step with decreasing the consumer demand (otherwise you create oversupply which is needless waste in terms of cost to produce and or to store).

This process continues until we quickly enter a compounding cycle that is negative in direction (less spending by consumers is met by less production and selling by businesses).

To sum up, consumers have less money to spend, or choose to spend less because of uncertainty (they begin to focus on saving / conserving their money to weather bad times).

Therefore, consumers buy less products and services from businesses (this reduces sales revenues and naturally impacts profit margins for all businesses).

Due to declining revenues and profits, managers of businesses and government entities typically take measures to:

Reduce costs to maintain or increase profit margins. Employees make up a significant cost for many organisations, and therefore in an aim to reduce costs, employees are usually the first to be fired as a cost-cutting exercise.
Increase revenue commonly through price related promotions such as discounts (but also through innovation; some of the greatest businesses and inventions were created in recessionary and depressionary economic climates).

The combination of these two actions results in an increase in unemployment within that economy and the lowering of costs of products and services as businesses compete with each other for ever-dwindling market share.

In the case of the economic lockdowns enacted by governments globally due to the Coronavirus Pandemic, these emergency actions effectively seize up the global economic machine meaning currency is not allowed to be exchanged between consumers and businesses.

Consumers can no longer buy, meaning businesses can no longer sell – the drop in sales revenue and profits trigger waves of terminations, fueling public fear, causing them to ‘save’ their cash and or reduce debt – this is what triggers a recession and depression.

I have drafted another article that details this point in relation to people being ‘furloughed or terminated’ here

What’s the difference between a recession and depression?

Before you can take the steps to recession proof your business, we need to better understand the simple difference between a recession and depression.

A recession is typically seen as a short-term reduction in economic activity (6 months to a couple of years) whereas a depression is usually a more severe decrease in economic activity that remains with us for many years as with the last Great Depression.

As business owners and executives, you have to use your best judgment to determine if we are entering a recession or a depression because the measures you may need to take will vary as a result in order to sufficiently protect yourselves.

If it is clear we may be entering a depression and not a recession, the measures needed to recession proof your business may need to be many times more significant which could cause greater levels of hardship for your employees.

Where to start to help recession proof your business?

1. Educate yourself and be cautiously open to the opinions of others

I personally believe you must continually educate yourself in the matters of consumer psychology, economics and politics – 30 minutes a day is enough compounded over years will make you equally as wise (if not wiser) than many of the economic and political advisors guiding our global policy (sad I know).

During your education, be wary of the opinions of others (naturally, don’t take the first opinion you hear as gospel). But with that being said, don’t shy away from opinions that go against your natural preferences; preferring resources that are aligned with your personal values and beliefs is called ‘confirmation bias’.

However, having only one perspective in any area of life can be very damaging to your decision making process, even more so when making business decisions which can impact the livelihoods of many employees and their respective families.

I have some insights how to define your company’s values to better guide both yourself and your team and ultimately improve sales in the process.

2. Determine and regularly follow the metrics that indicate economic health

There are indicators (metrics) that measure the health of an economy. Once known, we can research these metrics on a regular basis and track their progression through time. The insights from this data can then act as the basis for our economic and business decisions.

I have highlighted a few key metrics below, of which you should take into account how they impact your business from both a local level to a broader global level. For example, if you are a manufacturer, the price of oil globally may impact your manufacturing costs.

This can be said also for the introduction of a new tax in an area that you operate in (but this tax may not equally impact another business in a neighboring country for example).

Also review these metrics in the areas where your customers reside in, for example, if you sell goods to a foreign country, keep track of their data also to see if their economies are in decline or in a boom.

Their economic health directly impacts their ability to buy your goods and services – I have put links to each to help you understand their meaning for further research:

If possible, track and compare data Month on Month I Quarter on Quarter I Year on Year

3. Determine the right metrics that indicate your company’s health

Unfortunately, very few executives define the metrics and KPIs for their internal departments which is equivalent to an airline pilot flying without instruments and gauges (scary thought!). Yet, both occupations (a manager and a pilot) are responsible for the livelihoods of many people…

Personally I believe many executives do not track metrics given that there are literally thousands of metrics to choose from and become overwhelmed; the trick is to focus on a core set (say 10), then other relevant metrics are delegated to the managers of their respective departments to follow more closely.

If your business has invested in ERP software, this process can be much simpler given that the data sources are correct, however, if you run a smaller business, creating an Excel or Google Spreadsheet can be equally as effective if you are consistent with your data collection and analysis.

Here are a few top-level metrics that you can consider to track on a frequent basis to determine trends in your business. Naturally, you may wish to add or subtract metrics based on the nature of your industry. And again, I have provided links for each metric to further elaborate on their subject matter.

If possible, track and compare data Month on Month I Quarter on Quarter I Year on Year

Marketing & Sales

Accounting & Finance

4. Cut on inefficient expenditures using the Pareto Principle

Imagine you’ve suffered a terrible accident and are bleeding profusely in addition to a number of other painful ailments; what’s your doctor’s first course of action? It’s to first stop the bleeding before treating any other injuries (it’s the most critical to your survival).

In order to recession proof your business, think of your company as the patient, and imagine it’s bleeding profusely, but you’re not losing blood… but rather it’s your hard earned money going out the front door!

And just like the doctor above, your first priority must be to immediately ‘stabilize’ your business by stopping the hemorrhaging as it’s the most critical factor to your company’s survival.

Businesses can lose a significant amount of money annually due to inefficiencies that have built up and compounded with time; it’s time to review your company’s expenses and determine where savings can be made.

Here’s what you need to do:

List your company’s monthly expenses in an Excel or Google spreadsheet (refer to Figure 1 as a crude example). If you have accounting software, you can export all of your monthly expenses and work from there.
Place your largest expenses at the top in descending order.
Tally up the sum total of all the expenditures.
In a column to the right of the expenses, determine what percentage each line item is when compared to your sum total from step 3 above.
By doing this, it helps you to better identify how much ‘weight’ each line item has on your business in any given month. You do this by taking the line item expense, and dividing it with the sum total, then multiply by 100 to get a percentage – do this for each line item.
Leverage the ‘Pareto Principle’ and conduct a ‘Pareto Analysis’ By determining the 20% of line items that are driving 80% of your expenses. In figure 1, there are 6 line items in this example of which line items A and B are responsible for 68% of the monthly cost! This is the 20% of line item expenses that are most critical to stabilize our business.
Once you have done this exercise for your business, ask yourself the following questions, can the line items that fall in the 20% be A) cut altogether? B) if not cut, can they be reduced or outsourced? Can better payment terms be negotiated not to just reduce cost, but improve your cash flow?
After you have made improvements to the 20% of line items that generate 80% of your monthly expenses, you can then go back to your Pareto Analysis and make improvements to the remaining line items in descending order.

By tackling the most burdensome 20% first, savings here will yield the greatest improvement on your net profit margin putting you in a much stronger position to recession proof your business (you’ll have more capital to weather the storm, or make sound investments to your business).

Quick Note: You may not get exactly 20% of items generating 80% of costs, but rather another skew of percentages; the point is to not fixate on the percentages of weight, but find the overall skew / trend in the data (the core line items that are driving the majority of your costs).

Monthly Expenses	Cost (Currency	% Weight
Line item A	640,000	38%
Line item B	512,000	30%
Line item C	310,000	18%
Line item D	101,000	6%
Line item E	84,000	5%
Line item F	34,000	2%
Sum Total	1,681,000	100%

Figure 1 – an example of a simple Pareto Analysis of monthly expenses

To help you recession proof your business even further, and in doing so, find additional deficiencies for cost improvement, here are some questions that you can ask for Pareto Analysis:

Which 20% of our territories / branches generate 80% of our costs?
Which 20% of our suppliers generate 80% of our costs?
Which 20% of our marketing tactics generate 80% of our costs?
Which 20% of our staff generate 80% of our costs?
Which 20% of our liabilities generate 80% of our costs?

As every business is different, I highly recommend that you take time to formulate some of your own questions for analysis now that you get the overall idea.

5. Buckle down on products and or services that generate the most profit

To recession proof your business, typically most executives focus on cutting costs, but you also should not neglect the products and services that generate revenue for your business in the first place.

We can now leverage the Pareto Principle and run an analysis against your products and services to determine a wealth of information. Below are a series of questions that you can use the Pareto Analysis to answer:

Which 20% of our product / service lines sold generate 80% of our revenue?
Which 20% of our product / service lines generate 80% of our net profit?
Which 20% of our territories / branches generate 80% of our revenue and profit?
Which 20% of our marketing tactics generate 80% of our opportunities?
Which 20% of our staff generate 80% of our results?

Use this process to identify the core areas of your business that you can buckle down on to yield even greater results.

I have seen a number of businesses slash their product and service offering to a core few which yielded numerous benefits:

Additional investment in these areas increased revenue and profit
Customer and employee satisfaction improved due to the simplification
Word of mouth increased generating new referrals and opportunities
Star performers were identified, rewarded and ultimately retained (putting competitors at a disadvantage!)

To summarize, make sure you use the Pareto Analysis to identify both your weaknesses and opportunities in order to truly recession proof your business.

Please click the link if you would like some tips how to increase sales.

I also suggest reading this article to increase profit margins using the customer lifetime formula.

“A rising tide lifts all boats”
– John F. Kennedy

Conclusion

As a rising tide lifts all boats, a recession or depression will pull back the tide leaving thousands of businesses and people stranded. I hope the steps mentioned above will help you to recession proof your business for years to come.

Even though you may see reduced revenue from sales and lower profit earnings, at least your business will be in a stronger position to weather the damaging economic downturn whilst your competitors ultimately succumb to its effects.

If you would like to learn more about how to recession proof your business, please book a call with me today.