The world economy is heading into a slowdown, and possible a recession. Germany, normally the engine of Europe, has seen its growth rate fall below zero. Britain is steeling for a potentially chaotic exit from the European Union this fall. Trade wars are buffeting China, Japan and South Korea. U.S. growth has slowed, too — partly because of the same damaging trade battles.
If you have your eye on economic trends and news you know that many experts and politicians are either warning about an upcoming recession, or trying to allay fears of one.
CEOs, depending on who you ask, are either spooked at this prospect, not spooked at all, or are too busy worried about the present to care about what may or may not happen this year, or next, or the year after.
It makes sense to avoid centering business decisions around an unconfirmed recession. On the other hand, refusing to factor the possibility of one into your operations could be a recipe for disaster later on.
Of course, there is no one playbook for how to recession proof your business. Every business, and every recession, is different. We can, however, glean insight from how certain companies recession proofed themselves in the past.
Companies that have been borrowing or raising money, investing in new technology, and hiring like crazy over the last few years should take note of what has worked for firms that were resilient in the face of prior recessions. Here are a few tactics that could work for you:
REDUCE YOUR DEBT
One of the biggest hurdles that any business faces is running out of money, whether there's a recession on or not. That's why it can be helpful to have flexible financing on hand to deal with unexpected expenses, like a business line of credit.
The more debt you have, however, the more cash you'll need to pay off your principal and interest payments. During a recession, cash flow may slow, and you'll put yourself at risk of default if you have too much outstanding debt when a recession hits.
During the last recession resilient companies reduced their debt by more than $1 for every $1 of total capital on their balance sheet. By contrast, non-resilient companies had added more than $3 of debt. Reducing this debt gave these companies far more cash on hand by the time the recession was in full swing.
It's not that recession-resilient companies are debt-free - modest levels of debt are fine. But if you enter a fallow period with a variety of high-interest payments on your balance sheet, you're much more likely to encounter trouble. Consider reducing or consolidating your debt now in advance of the recession becoming official.
DIVERSIFY YOUR SUPPLY
Sometimes in a recession, the issue isn't a lack of demand. Some products see a boom in demand during recessions.
The issue may instead be a lack of supply. If you're overly reliant on certain manufacturing suppliers, what happens when buying from those suppliers becomes cost-prohibitive during a trade war, or if they go out of business? That might force you to source your supply elsewhere, while demand piles up and some business departs for better-prepared competitors.
On the flip side, you might be able to pivot and offer customers related services that they were previously paying another company to handle. If their current solution goes south and they're looking for another option, your diversified supply of options could fill that gap. For example, if you create point of sale systems and software, incorporating inventory and customer relationship management may make you more appealing to customers looking for an all-in-one solution.
GET CREATIVE WITH COST-CUTTING
Cost-cutting during a recession is almost a given. And when most of us think of cost-cutting, we think of layoffs, since paying for employees and their benefits is a major expense. But the more resilient companies from the last recession made operational improvements, rather than reducing their labor force, a priority.
For one thing, laying off employees is a blow to productivity and morale. For another, when the economy improves and it's time to bulk back up, businesses can find that the costs of recruiting, hiring, and training are prohibitively high.
So rather than resorting first to scaling back your people, investigate cutting labor costs in other ways. You could reskill your employees or invest in technology that makes your company more efficient, such as automating tasks, Big Data mining, and other improvements that make your business more agile and flexible. Maybe a remote-based workforce that doesn't require office space is the move.
Again, there is no sure-fire way to avoid the fallout of a recession. But the above tips are good business practices as much as they are recession defenses - so consider how you can start making progress on reducing your debt, diversifying, and creatively cost-cutting today.