Experts predict a mild recession by the end of the year, but how can you best prepare your business?
The pandemic started a wild economic ride over the past two years and now, according to prediction models, a recession is likely near. How mild or severe it will be is a debate for economists. However, most experts are predicting a mild recession by the end of this year after the Federal Reserve raises interest rates.
“With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild recession starting in the fourth quarter of 2022 is now more likely than not,” economists at Nomura Holdings Inc. wrote in a June 20 note widely published by financial experts.
The Federal Reserve plans to continue raising interest rates into 2023, which will naturally affect the overall business climate. For organizational leaders, being prepared is key to surviving this recession with a healthy bottom line.
Boost Midwest finds that when organizations face economic uncertainty, creating a specialized business plan early is one path. Another is to modify your existing business plan to minimize financial risks over the next 12 months. Both address mastering your cash flow and being adaptable to changing economic outlooks and conditions. For either approach, the goal is emerging resilient during and after the economic downturn.
“Getting ahead relative to peers (even slightly) during recession gives companies an advantage that is tough to reverse when the economy is doing better,” the Harvard Business Review noted in a 2019 article.
The article authors, Kevin Laczkowski and Mihir Mysore, analyzed the recession that started in 2008 and found that those businesses that reduced operating costs earlier in the recession cycle, and more deeply, actually increased their EBITDA — earnings before interest, taxes, depreciation and amortization — by 10%. Meanwhile, the businesses that did not were faced with 15% loss using the same EBITDA scale.
Yet every recession is different, and what economists and analysts often overlook is the mental toll business owners experience when addressing a recession. Denial and indecision can make it difficult to take action at the right time. Yet early action is what financial experts recommend as the best way to prepare.
5 Best ways to prepare for a recession
Reduce Operating Costs.
Organizations may be more constrained when it comes to cost cutting than in 2008. Today’s business model is a lean one, and operating cuts can create a backlash if they affect values important to customers and employees, such as equity and income equality measures. So it’s important to choose where and how to cut even 1% of operating costs. Additionally, you should know exactly where your financial numbers stand right now and closely monitor your daily operations.
Also important is knowing that a knee-jerk reaction to a recession or paring down your business model will likely result in a stagnant or failing business by the time the economy recovers.
Focus on Productivity and Growth.
This is probably the best time to implement digital tools and analytics to help drive productivity and growth as a hedge against the recession. Advanced analytics can increase quality and lower error rates in manufacturing, implement self-service options for customers and simplify the purchasing process, Laczkowski and Mysore note in HBR.
Manage Your Workforce.
While many human resources teams are focused on finding the right talent to fill vacant positions, when a recession looms there are specific steps to take regarding an organization’s workforce:
Review job descriptions for any overlaps or uneven distribution of tasks.
Use team members expertise to find ways to reduce costs and gain efficiency.
Offer employees reduced hours or unpaid leave, if your business can support this.
Keep morale up through small tokens of appreciation — pizza, anyone? — and individual and team recognition.
Consider outsourcing certain functions.
Review the potential for automation.
Maintain Customer Loyalty.
Customers drive revenue and should be a priority before and during a recession. While it’s likely your organization will lose customers during an economic downturn, focus on minimizing those losses and that those customers who do leave return in as the economy improves.
Deliver exceptional customer service
Maintain quality after-sale services
Keep communication lines open
Manage Cash Flow & Keep Debts Down.
It’s always good practice for a business to know where its cash is flowing in from and where it’s flowing out. Before and during a recession, this becomes critical. You should have a full understanding of the current state of your business’s cash flow so you can plan ahead to ensure enough is coming in to sustain operations.
However, borrowing capital is not traditionally advised during economic downturns. Rather, paying down debt should now be a higher priority. Research into the last recession showed that “by the time the economy was in full-on recession, the resilient had reduced their debt by more than $1 for every $1 of total capital on their balance sheet. By contrast, non-resilient companies had added more than $3 of debt.”
Balancing resiliency, sustainability and growth is always a challenge that requires foresight and planning. Boost Midwest focuses on operational success with an eye to driving growth and can help you work towards a recession-proof plan. Contact our team today for a free consultation.