When will the next recession hit us? Everyone wants to know, but that’s not really the best question. It is, however, pretty close to very good question.
I’m Dr. Bill Conerly, economic consultant and author of Businomics. Why is this not a good question? Because I don’t know the answer. Ask me something I can help you with. And I’m not just being flippant. The economics profession is not very good at forecasting recessions ahead of time. I’m proud that the year before the recession, I was telling my clients that the risk of recession was high enough that they should be doing contingency planning. That was when everyone knew the boom would last forever.
There are some forecasters claiming to have predicted the recession. All the ones I’ve heard of, though, were predicting recession every year, good or bad, for decades. They are like the broken clock that’s right twice a day. The doom-and-gloomsters are right once a business cycle.
So what’s the good question? How about: what should I do if I’m running a company and I don’t know when the next recession is coming. I want to be prepared, but I know that if I hunker down too soon, I’ll miss the opportunities of the good years.
I’ll offer an elaboration on some techniques I describe in my book, Businomics. So listen carefully if you want to save yourself $14.95 plus shipping and handling.
You first should evaluate your vulnerability to recession. Looking at how the recent recession affected you will give you a good handle. The key, though, is to be data-driven. Before the recession, I heard plenty of folks say that their business would do better in a downturn. Mostly that’s hogwash. On the Businomics web site, I have a listing of how different industries actually perform in a recession, so be fact-based as much as possible.
After evaluating your own vulnerability to recession, it’s time to develop your customized early warning system. Identify the spending decisions that lead to sales. It’s not as simple as whether you have made a sale, in many cases. The guy who sells shopping bags to Nordstrom. He should not be monitoring only his own sales to Nordstrom. He should be monitoring Nordstrom’s sales, because they won’t cut back on their purchases of bags until they have seen their own sales turn down. I also suggest that you monitor economic factors that drive those purchasing decisions. So if you are dependent on discretionary consumer spending, for example, watch disposable consumer income, consumer confidence, and so forth.
For many businesses, an important part of the early warning system is watching sales representatives reports. If your sales reps are doing a good job of logging potential sales, interest, meetings, and proposals, you should be able to see a downturn coming even before you sales fall off.
So now you have evaluated your own vulnerability to recession, and you have developed an early warning system. It’s time for contingency planning. Start with a single sheet of paper. You don’t want to fill a binder, you only want key ideas. You can take off to the bar or Starbucks of your choice, or better yet, meet with your senior team. Brainstorm on what actions you will take if sales turn down. By visualizing your possible actions, you prepare yourself. It’s even good to set some decision rules. If sales drop by 8 percent from a year ago, we institute a hiring freeze. If sales drop 15 %, we’ll lay off 10 production employees.
When I meet with a management team, I run through a checklist of possible cuts that I’ve developed by working with businesses in a variety of industries. It’s important to begin with a long list of possibilities and then narrow it down.
You’re almost done. You have evaluated your vulnerability to recession, set up an early warning system, and sketched out a contingency plan. Now, manage the business to maintain the flexibility to take action as needed. Here’s a family example of maintaining flexibility, but it applies to business as well. My son told me that he qualified for a free new cell phone. I said “Free?”
He said “Yes, it’s been two years since I got my phone, so now I can get a free one.”
I said, “It’s not free. You have to commit for another two years of cell phone service. You won’t have the flexibility to change providers or cut way back on your service.”
I’m not saying that a free cell phone isn’t a good idea. Sometimes it is. But when you lock your business into a long-term commitment, you give up flexibility. Don’t do that unless you’re getting a really good deal. Think about this with respect to employees versus contractors, real estate leases, debt versus equity, and long-term supply agreements.
Get ready for the next recession by following these four steps: assess your vulnerability to recession, set up an early warning system, sketch out a contingency plan, and maintain your flexibility to implement the plan. You can do it yourself, but if you would be more comfortable with professional help, give me a call. I’m a consultant and I love helping businesses lower their risks and increase their profitability.