Speculators, analysts, and even central banks are divided on whether or not there will be a worldwide recession, but research from previous recessions shows that companies who invest aggressively in important projects during downturns expedite their recovery. In most cases, these investment choices were all about being digital.
Currently, the US economy is showing multiple signs of a slowdown, including an inverted yield curve, slower consumer spending, and tighter liquidity. According to the Conference Board’s June 2022 C-Suite Outlook, 15% of worldwide CEOs stated that their region was already experiencing a recession, and more than 60% predicted one in their principal location of operations within the following 12 to 18 months.
The recessions that followed the financial crisis and the COVID-19 pandemic taught business leaders from around the world a lot about how to survive downturns. It is important to note that the businesses that made it through these downturns were well-prepared, seamlessly adaptive, and took courageous steps to face the challenge. So, the key to surviving the next economic downturn is preparedness and proactive action.
This blog outlines the four Cs of recession readiness and what companies can do to buck up and survive the onslaught of economic downturns.
1. CLA (Cash, Liquidity and Asset) Assessment
Business executives should create an annual budget, followed by short- and long-term direct cash flow forecasts, starting with evaluating their company’s existing and anticipated cash needs. These will offer a complete understanding of weekly, monthly, quarterly, and annual cash intake and outflow. These forecasts should be updated regularly as the economic and market conditions change.
Improve the processes for cash receipts, payments, and inventory management. It is important to evaluate any trapped working capital cash and compare the company’s cash conversion cycle to that of your competitors and industry norms. Through proactive measures, working capital can be streamlined, freeing up trapped cash and reducing the need for additional liquidity.
To comprehend their possible other funding sources, such as equity raising and the monetisation of non-core assets, organisations must first evaluate their monetisable assets. All physical and intangible assets should be valued in both healthy and unstable economic conditions.
2. Critical assessment of your organisation
Organisations should evaluate processes, people, assets, and technology. The related expenditures can then be placed into three groups:
This will help the company manage its spending. Then make a critical evaluation of the organisation. The following categories should be used to conduct an organisational and associated expense analysis across the entire organisation:
- Business processes
- Human capital/personnel
- Capital expenditures and assets
- Technology and software
These categories should be assessed across four areas: Critical, Non-critical, Strategic, and Forecast Spend.
Using this approach, a business can respond quickly to a downturn by limiting cash outflows at periods when cash inflows are anticipated to drop if it has already decided which processes or assets are non-critical.
Additionally, business leaders can categorise organisational spending and reduce costs by using technologies like ZBB/ZBO/ZBA, along with historical trends and benchmarks, to create budgets and set goals.
Then, utilise scenario analysis to create mitigation strategies. Scenario analysis helps assess how well a company will operate under various scenarios of probable economic stress, such as low, medium, and high-severity recessions.
3. Communicate Goals and Renegotiate
Before a downturn, business leaders should build strong connections with important stakeholders, especially by maintaining open lines of communication. If your business is doing well, you should use this to renegotiate the conditions.
Renegotiate with vendors: Try renegotiating terms while paying vendors on time to increase credit availability and decrease the demand for working capital. When negotiations are undertaken in tranquil times, successful results are frequently achieved.
Renegotiate with lenders: It is more likely to produce a win-win situation involving forbearance or covenant relief if lenders are informed in advance of a projected performance decline rather than being caught off guard. Work on a list of potential backup lenders to guarantee they are receiving the greatest credit terms and availability.
Talk to your consumers: Conduct customer profitability and order rationalisations analysis, and let your customers know when you expect to have certain products and services available. If possible, renegotiate payment terms and pricing to reflect inflationary cost rises and ensure the quickest cash collection.
Update your employees: Periodically update your staff and equity owners on mission-critical goals. Examine compensation arrangements and plans to see if cash outflows can be delayed during a downturn. Additionally, you should reevaluate your hiring strategies to prevent making non-essential hires during a recession.
4. Create Competitive Business Design
Sometimes a downturn leads to mergers and acquisitions, giving businesses the chance to make smart purchases or sales. To take full advantage of this situation, business leaders should focus on designing the new path competitively.
Conduct a detailed examination of the industry’s key players and the top prospective synergistic partners as part of the competitive landscape. You should, at the very least, perform a SWOT analysis on your main competitors to determine their strengths, weaknesses, threats and opportunities.
Conduct possible transaction analysis. To properly assess potential offers, business leaders require a complete valuation study of the company, including a sum-of-parts analysis and potential synergy analysis.
Examples of business sectors that have done well during Recession
Businesses in all industries do not necessarily need to be terrified by a recession. Some industries remain unaffected even amid an economic downturn. Here are three sectors that continue to do well even during a recession.
Essential Goods Transportation
Regardless of whether a certain product is seen as necessary or not, at some time throughout its lifespan, it almost certainly needs to be carried from one place to another. During a recession, businesses that handle the transportation of freight and essential items will still be required. While many people would travel less for pleasure, transportation to work and the delivery of necessities to store shelves will still be necessary.
Healthcare is one of the expenses that most people find challenging to minimise. Regardless of your income, your health still has a value that cannot be readily diminished by a loss in income. Regardless of the situation of the economy, organisations participating in healthcare operations will still be required. The healthcare industry is one of the few industries that is not particularly threatened by recession.
Consumers can only reduce their spending so much when their income is down. They will spend money on groceries, home repairs, and kids, even in the middle of a recession. Retailers who offer these products to customers at reasonable or reduced costs will undoubtedly succeed during a recession, even when people try to save money wherever they can. As a result, the businesses that supply these retailers with essential items will continue to turn a profit because the market for their goods can only decline so much.
A recession’s onset, scope, and duration are incredibly difficult to forecast. As mentioned above, to survive it, preparedness is essential. By applying the aforementioned ‘Four C’ method, companies can strengthen their resilience and create a solid foundation for concentrating resources on areas that will yield the greatest return.
Blue Helion is a boutique growth and operations advisory firm that specialises in offering insight based advisory and execution support to businesses. We help you overcome critical business challenges, prepare during uncertain times and help bridge the chasm between strategy and growth outcomes.