With last week’s announcement that GDP declined in Q2 2022, an economic recession has technically begun — this series of blogs will highlight practical steps that business owners and managers should consider in preparation for a downturn. Over the next 12 weeks, we will discuss:
- How to Prepare for a Recession
- The Profit-and-Loss Ratios Businesses Must Always Follow
- How to Create a Business Forecast
- Test Assumptions to the Business Forecast to Consider “What If” Scenarios
- How to Understand Working Capital Requirements
- Particularly in the Face of a Recession, Keep Capital Providers in the Loop
LEVERAGE THE EXPERIENCE FROM THE PANDEMIC TO RESPOND TO TODAY’S RECESSION
To prepare for an economic downtown, it is important to look to the past. Examining what happened during the pandemic shutdowns can provide a helpful perspective. During the lockdowns, many businesses experienced sudden sales disruptions, supply chain challenges and labor shortages.
While we do not expect this recession to be as sudden as the pandemic-related shutdowns, it might be longer, and there are unique lessons to be learned from the pandemic for every enterprise.
A key piece of advice to owners is to review their individual experiences during the shutdowns to understand where challenges arose. For example, GHJ has a client in the medical services business who had a loss of revenues months before most other businesses did because it sold products to overseas medical travelers.
In the food and beverage space, GHJ’s team saw a variety of experiences. For example, a restaurant owner who never tried home delivery experienced a total loss of revenues, while another weathered the storm through a quick pivot to home delivery. Conversely, a direct-to-consumer apparel client experienced significant growth in sales from taking a calculated risk by increasing social media marketing spend. How businesses reacted to the pandemic-related shutdowns will provide a head start on preparing and pivoting for this recession.
ADD VALUE TO FUTURE-PROOF OPERATIONS
During previous recessions, many companies have found success focusing on value-creating activities, an approach that yields greater results than it does during healthier economic times. In order to remain stable — or even prosper — during these uncertain economic times, GHJ’s Growth Planning and Strategic Advisory team recommends that businesses take the following steps:
1. Ask the Right Questions Now — Before Choices are Eliminated
Clients are advised to take time away from the day-to-day to reflect on the likely impact of an economic slowdown, perhaps with an outside advisor, who will see what the business owner may miss and ask questions from a new perspective.
Some questions that companies should consider include:
- Did any service lines, products or business units undergo a substantial loss of revenues, and would they be vulnerable in a recession?
- Is a business line discretionary, or is it a staple required day-to-day?
- Considering all products, channels and customers, are any of these lower-margin or more difficult to service? Can any be discontinued to focus on core or more profitable business lines? We sometimes find that getting smaller gets more manageable and yields greater profitability.
- Conversely, are there any skillsets that will enable the business to enter profitable new markets that may thrive during a downturn?
- What supply chain problems occurred, and how did you respond to them?
2. Adjust Operations to Fit the New Strategy
Once the business has contemplated trimming and/or adding operations in order to survive — and possibly grow — it would then be prudent to review the impact of any changes or shifts on the business and the cost of operations: Will the same level of labor, capital or other inputs suffice, or will more be needed? It might be an appropriate time to find talent availability at a reasonable cost.
3. Go on Offense with Opportunistic Acquisitions
Finally, consider opportunistic acquisitions. Your competitors and/or suppliers and/or customers might provide prospects to make strategic changes to integrate either vertically or horizontally. Great value for buyers can be gained during recessionary periods, and for those with dry powder and staying power, being prudently bold can create outsized value.
The next installment of this series will more closely examine how a business operation is affected during a recession. To learn more about how a business can prepare for a recession, contact GHJ’s Growth Planning and Strategic Advisory Team.