Economic downturns at macro levels end up affecting businesses at micro levels. Though we often use downturn and recession interchangeably, they have some differences between them; a downturn is typically a decline in the GDP growth rate, while a recession is a decline in GDP itself. Another major difference is that a downturn is comparatively short-term compared to a recession. A fall in GDP over two consecutive quarters is considered a recession.
These finer differences apart, we will discuss the economically difficult times which both are. They, however, come in cycles. A downturn is inevitable after a few years of fast-paced growth as we have seen in the case of China, India, and the UAE. Downturn and recession can happen due to systemic reasons like inflation and interest rates, as well supply chain disruptions as we experienced during the Covid-19 pandemic, oil price movements – a rise affects some countries positively and some negatively -, investor psychology, political crisis like the ongoing Ukrain war, etc, among many other reasons.
As a business owner or CEO, or cofounder, you must always be cautious of impending threats, some of which occur after giving a signal and some come as surprise. So how can you protect your business from a future economic downturn? We will discuss some of the prominent strategies that you can follow to navigate your business during difficult times. Let us review them under three categories; financial management, customer management, and operations management strategies.
Financial Management Strategies
Focus on Cash Flow
Along with concentrating on t returning a profit, equally important, is focusing on cash flow by revisiting and negotiating payment terms, which includes getting a commitment for a shorter credit period and timely payment follow-up/collection from customers and as well extended credit from your vendors. Even when your sales and profit don’t suffer during the downturn, not having sufficient cash to pay your employees, suppliers, and lenders can derail your business. So, when it comes to creating financial management strategies, it is important you pay attention to cash flow.
Build Cash Reserves
Cash flow is one of the most critical elements in business during normal times and difficult times. Whether you receive signals or not about the forthcoming downturn, you must focus on keeping a cash buffer to tide over such situations. It may be highly difficult to find sources of funds during such times because almost all sectors including the financial sector will be under stress and loan disbursement gets delayed and more expensive. This makes it crucial for you to make building cash reserves for difficult times a normal cash management practice.
It is provident for businesses to reduce and clear high-cost debts to minimize the pressure on the bottom line and cash flow. At the same, you should be able to access quick low-cost loans in case of contingency. Applying for an overdraft facility and keeping it may be something for businesses to consider to improve their cash runway.
It is critical that you keep your corporate and personal credit scores and balance sheet healthy. In other words, you must get rid of expensive loans as much as possible, but maintain the credentials to avail of loans when necessary.
Volatile times are not ideal for planning capital investments to expand, diversify, explore new markets, acquire businesses, or add capacity. It will be difficult during uncertain times to forecast the future risks and returns of your investments as accurately as required. It will only strain your cash flow further.
Customer Management Strategies
Don’t Apply the 80-20 Rule in Marketing
The Pareto Principle, known as the 80-20 rule says 80% of outcomes come from 20% inputs, which is great in most scenarios. However, taking a cue from the old adage ‘ don’t put all eggs in one basket, your customer base must be as diversified as possible. So, be diligent before considering the application of the 80-20 rule in sales and marketing. Where possible, ou must diversify your customer base not just across customers, but as well across multiple industries and regions if that is applicable to your business. During normal times and difficult times, some industries do well and some are below average. Your business should not suffer because of difficulties faced by one or two customers or industries.
While it is important to diversify your customer base, it is equally important to keep your core customers very happy and retain them. Studies have shown that it is 5 times more costly to acquire a new customer than retain the existing one. More than a customer-vendor relationship, you must build a partnership relationship to work together to tide over difficult times. When it comes to service companies, make sure you do not increase your number of customers to the point where you can no longer provide them with the expected experience. Keeping your customers happy will ensure an uninterrupted flow of consistent referrals that will not dry up as a result of a downturn in the economy.
You must consider entering into long-term contracts with your customer so that you will not run out of work during difficult times, provided the customers you have contracts with are not in bad shape at the same time. Likewise, it is important to be diligent enough to factor in foreseen and unforeseen risks in the future while drafting a long-term contract. You should not suffer because of adverse terms in the contract and as well should protect the interests of your customers.
Operations Management Strategies
Digital Transformation and Automation
No business can survive and grow in the current world without the adoption of digital technology. What may excite here is that digital technology that could once be afforded only by large enterprises has become accessible for small businesses including startups because most applications are now available on the SaaS model, Opex against the previous Capex model. Covid-19 has shown us how digital adoption can help businesses navigate the downtimes effectively during bad times. Automation, one of the major benefits of digital transformation, helps you enhance efficiency and productivity to reduce operating costs, and employee performance, improve revenue through reduced customer acquisition cost (CAC), and better cash flow through efficient collections.
Look After Your Team
While on the one hand, companies find it hard to onboard skilled workers, a large employee count becomes a burden for companies during a downturn. However, the right strategy is not to lay off workers during difficult times and go back to them when things get better. The demand for talent will be high and therefore expensive when the outlook gets positive. The best approach will be to buy in the confidence of the employees so that they will be ready to take a cut, which is a win-win for both employees and employers.
Concentrate on Core Business
It’s better to focus on your core business and competencies and eliminate or keep aside the segments that are still evolving or in bad shape. You should also weed out inefficient activities from your business operations. You must cut down least-efficient activities and low-margin products and concentrate on the core products and businesses that can survive the tides and at the same deliver cash flow to sustain.
One of the reasons that lead to recession and downtown is the disruptions in the supply chain or they aggravate the supply chain problems. Like in the case of customer management, managing vendors for your suppliers, particularly of inventories that are critical – finished goods or raw materials – is crucial for your business to survive during downturns. Diversification of sources for your supplies without depending on one or a few suppliers is the right approach.
One thing that we can be sure about in business is the inevitability of the business cycle. Keeping prepared for contingencies – or just the next unavoidable downturn or recession – can be critical to future success. The pandemic taught us that those who are not ready for the worst may find it hard to survive, but those who perpetually prepare for difficult times will not only sustain but will also grow. As today’s small business owners find themselves navigating the difficult economic and market, there are steps they can take to better prepare themselves to sustain during the next economic downturn and all other phases of the business cycle. A proactive approach based on the understanding of the financial health of the company and economic conditions at the micro level will help small business owners prepare for the unexpected and drive the business toward success.
Paci.ai, a unified finance management platform for SMBs, looks forward to tackling the backward-looking nature of accounting with its insights and predictor modules.
The insights module works on the concept of proactive messaging on trends (Income, expenses, cash flow, customers, and key notifications providing a small business with actionable insights at the right time.
The predictor module ( Coming soon), leverages historical data to simulate key but the day – to day decision-making on hiring, buying capital equipment, and planning promotions among others.