5 Tips to Recession-Proof Your Business
Companies usually do not fail because they lack innovative ideas but because they run out of cash.
Whether a recession is looming is anybody's guess. However, as a business owner, you shouldn't ignore the warning signs. "Hope for the best but prepare for the worst" has always been good advice. I know entrepreneurs should always think positively, but a little paranoia can often mean the difference between success and failure.
Companies usually do not fail because they lack innovative ideas but because they run out of cash.
When times are good, enough investors often line up to give you money in the form of loans or equity to help your business grow. These investors sometimes do not even require your company to make a lot of profit as long as you keep your growth rate. In these times, growth is everything because money is cheap and plentiful.
Unfortunately, the money spigot usually dries up quickly at the first signs of a market slowdown. I am not referring to a deep recession, just a slowing economy. But this slowdown will leave you scrambling for cash. In my career, I have been through several recessions, and I have always found that the companies that are best at preserving their cash usually survive. In a recession, cash is king.
With this in mind, here are my 5 tips to recession-proof your business.
Tip 1: Question Every Business Line
As a rule of thumb, if a business line is not profitable in a booming market, it rarely suddenly becomes profitable in a recession. However, profit is not a precise metric. There are at least two different profit levels.
Gross profit (IRS Pub 334 Chapter 6) measures the difference between your net receipts from selling a product and the expenses directly related to these products, such as raw materials, freight, and direct labor, which are called the cost of goods sold (IRS Pub 535 Chapter 1). If a business line cannot generate a positive gross profit, you should question your motive for pursuing such a business.
Net profit is the difference between your gross profit and your indirect (overhead) expenses. A negative net profit of a business line is not an immediate reason for alarm. It can be caused by weak gross profit, too high (direct) overhead expenses, too high expense allocations, or a combination of all three. Before taking action, you should try to understand the necessity of each line item in your overhead expenses.
However, a prerequisite for questioning every business line is knowing the monthly profit of your company.
▶ 5 Reasons Why Knowing Your Profit Is Crucial for Your Company's Success
Tip 2: Benchmark Your Product Cost
Perhaps benchmarking has gone a bit out of fashion, but it is a crucial tool that can reveal how much you spend on a product compared to what your competitors are likely paying.
If the resulting gap is wide, you should think about ways to narrow it.
If you offer product features that your competitors do not include but increase your cost, you should check with your customers how much they value these additional features and whether they would be willing to pay more for them. If your customers are indifferent about these product features, you should consider redesigning your products and aligning them better with your customers' needs.
Tip 3: Make Your Processes More Efficient
The profit your business generates during economic booms can easily hide many inefficiencies.
When times are good, a bloated cost structure is rarely questioned.
However, with decreasing profits, the office with the gorgeous view, the warehouse with the extra space, or the additional management layer can quickly become a cash drain.
Inventory turns, span-of-control, and lead times are simple non-financial efficiency measures that can help detect organizational bloat but can also be used to track efficiency improvements. Think of them as if you went to a doctor to determine your weight, blood pressure, and agility. The results show your current situation, but they can also help with addressing any problem areas.
Tip 4: Broaden the Industries You Serve
Not every industry is in a recession at the same time.
When the dot-com bubble deflated in 2001, tech was at the center of the storm. When the housing market crashed in 2008, it was finance and construction from which the recession spread. In 2020 the recession affected those companies the most that couldn't switch to remote work and e-commerce.
To recession-proof your business, you must make it less dependent on a single industry. While you cannot completely protect your business from shocks, you can make it more resilient.
Tip 5: Reward Your Best Employees
How well you weather a recession depends not so much on your own ingenuity and dedication but on the creativity and commitment of your employees. They interact with your customers daily, often hearing their pain points and frustrations unfiltered.
Listen to your employees, bring their insight into your meetings and discussions, and reward them for their hard work. Keep an open mind and be nimble. Maybe, you will find a new profitable business opportunity.
The Best Time to Prepare for a Hurricane Is When the Sun Is Shining
Having lived in South Florida with my family for over ten years, I have gone through several hurricanes. You can track their path and forecast where they are headed. But they are hard to predict because so many factors out of our control influence them. Sometimes, we got lucky, and they turned last minute or weakened before they hit the shore. But three times, we experienced their full force. We were out of power for weeks. But we managed thanks to our preparedness. When the hurricane season started, we checked the roof and windows, kept our yard free of debris, trimmed the palm trees, and stocked up on water, canned foods, and propane for our barbecue.
What we have learned in Florida is that the best time to prepare for a hurricane is when the sun is shining. A recession is no different.
