Planning for a Recession: What to Do Now

Even as unemployment claims top 30 million and global financial markets whipsaw as companies grapple with the full impact of the coronavirus on their businesses, the U.S. still hasn't technically entered a recession (a recession is defined by the National Bureau of Economic Research (NBER) as "a significant decline in economic activity spread across the economy, lasting more than a few months..."). An official recession is likely to be announced if Q2 2020 GDP growth is negative, which may further constrict business activity and signal prolonged economic sluggishness, putting more downward pressure on already struggling business owners. Before that happens, business owners may want to consider taking a few steps to hedge against recession-caused disruption. 

1. Secure more favorable payment and financing terms.

Lack of cash flow is one of the most immediate threats to your business, and is likely to get worse if a recession kicks in. You can help improve yours by taking this time to negotiate better payment and financing terms (e.g. allowing you to pay bills in 90 days vs. 30) or temporary discounts and deals with suppliers and vendors. Likewise, you can help accelerate the amount of funds coming in the door by offering clients discounts on preorders for products and services or offering pricing specials (such as 5%-off coupon) if their outstanding invoices are paid more rapidly. Time before a potential recession hits can also be used to negotiate with lenders and landlords regarding temporary suspensions in interest or rent payments, including implementing a working plan for how you’ll eventually repay these sums.

2. Build out your credit options.

Having lines of credit you tap if money gets tight can help you out in a pinch. Now’s a good time to speak with lenders (including your credit card company) and up the maximum amount you can borrow. While it’s not always necessary to tap into these resources, having backup reserves may come in handy if times get lean, especially if other businesses are feeling the pinch themselves and unexpectedly extend financing terms or withhold payment. Similarly, it’s the right time to begin saving more of any money that comes in the door and setting aside a 30% cushion for future expenses. Remember: Regardless of what the terms on any given invoice say, during times of recession clients might delay payment even as your own bills begin to come due, and customer activity can drop off with scant notice.

3. Reduce unnecessary overhead and expenses.

If a purchase doesn’t serve a vital purpose, get it off your balance sheet. If a more affordable option exists for getting a task completed with similar time and quality standards, make the switch. Similarly, before a recession hits is an opportune time to start pivoting away from long-term contracts and instead moving towards pay-as-you-go services and on-demand business solutions. While doing so may cost you more on an individual per-task basis, these expenditures can be far less risky than keeping a fixed, long-term expense on your books. In addition, look for areas of your current operations where affordable, high-quality alternatives exist that you could quickly implement instead. For example: From search engine marketing to foreign language translations, many online marketplaces provide access to prebuilt solutions or value-priced providers that can help with recurring business needs at a fraction of your current costs.

4. Employ flexible staffing solutions.

While several government programs currently offer assistance if payroll is a concern, it’s hard to say what financial impact they’ll have if and when a long-term recession hits. However, in the event one arrives, before you consider laying off staff, remember that a number of alternate solutions can potentially help you avoid reducing headcount. For example, you might: reduce workers’ hours; implement furloughs; ask employees if you can stretch out salary payments; put bonuses and incentives on hold temporarily; or institute a small company-wide pay cut across the board. Alternately, you might also assign employees more responsibilities to help boost productivity and increase their impact on the bottom line.

The one thing you can currently count on as a business owner is that uncertainty is the only certainty going forward.

In addition, many small businesses are increasingly outsourcing certain needs to freelance contractors, taking on interns and crowdsourcing contributions as a means to cut costs as well. Furthermore, you might also choose to temporarily forego a portion of your own salary, or set up a fund to help teammates in need, as many executives keen to lead by example have done.

5. Focus on scenario planning.

Scenario planning is the exercise of asking yourself a simple question: What if? For example: What if stay-at-home orders are extended longer than anticipated and customers can’t visit your retail stores? Or what if car sales or live event ticket spending suddenly plunges in the wake of rising unemployment rates? Think ahead and plot out trends and events that are likely to occur over the next year, as well as their potential impact on your business. Then brainstorm additional wildcards—such as a sudden collapse in supply chain fundamentals due to political volatility throughout a global region or a second wave of viral outbreak—that could impact how the market for the products, services or solutions you offer develops. Once done, consider how the future is likely to look for your industry and the role you can play within it. Then work backwards to determine which business strategies are likeliest to help you safely bridge the gap from your current operating reality to this future state.

6. Determine where to refocus and reinvest.

Recessions are scary times, leading many businesses to quickly abandon plans and pull back spending habits. But what if you’ve been planning for these downturns in advance and socking away a healthy nest egg for a rainy day, like experts advise? In that case, now may be a good time to spend on growing your resources and capabilities and ramp up your market presence. In other words, the best defense, as they say, is a good offense. Ask yourself: Where do growth opportunities currently exist? Where could you be making a promotional splash? Are there new markets you could be entering, or ways to better position preexisting products or services to meet customers’ changing needs? During times of recession, the more competitors retreat, the more they create opportunities for you to build competitive advantage and advance. What’s more, now’s also a potentially good time to focus on internal improvements such as process improvement and employee training.

Recessions can be intimidating for many organizations. But even when they arise, they don't have to be a showstopper. With a little advance planning and a little ingenuity, you can ultimately come out ahead of adversity just by teaching yourself to look for ways to make the most of an otherwise challenging situation.

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