In this article, we answer important questions regarding the looming recession, including giving your business a set of 12 updated tips on how to respond.
A recession is an economic downturn that is felt in most part of the economy for two quarters in a row. Demand typically falls for businesses in a clear majority of industries, leading to lower activity and reduced employment. This in turn in can be measured in lower economic output, including setbacks in industrial production and sales to businesses as well as households.
A more theoretically correct definition of a recession is, according to the US Bureau of Economic Analysis, “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Relevant product: Our contract life cycle management tool and our IFRS 16 compliance tool
The short answer is, less is sold – because demand falls. When less is sold, less needs to be produced. When the production of goods and services falls, fewer people than before are needed at work, creating unemployment. If the fall in demand is deemed to significantly jeopardize desired profit levels, businesses often start laying off support staff – even personnel considered important for the long-term growth of the company. This contributes even more to the overall unemployment rate. Lower employment rates reduce overall demand for goods and services, creating a spiral of lower demand and activity.
Maybe. The world economy is in disarray. Energy prices and inflation are rising, interest rates hurt demand, war hurts supplies, and logistics chains are still not back on track after Covid. Margins are squeezed. That matters to the whole company, and to the CFO in particular.
CFOs and finance teams have a lot to tackle if they are going to help their businesses thrive and survive. Management teams and their boards are almost constantly asking them to provide regularly updated cash flow forecasts. All the pressures can be overwhelming.
CFOs are evaluating what short term cash savings can be realized by closing locations or cancelling supplier contracts.
(Below the picture: How to prepare for a recession)
We believe businesses exist to bring long-term value to shareholders, customers, employees, and other stakeholders. A recession is something a single businesse cannot impact. It’s like when an athlete preparing and signing up for a normal 5,000-meter run, but that proves to be a hurdle competition on the day of the event.
While this hurdle competition is hard to welcome, it should be seen as a great opportunity. Because not every business will make it, your company may be among those coming out of the recession leaner, with fewer competitors and more customers. Thus, the unforeseen recession can be a road that leads to higher long-term value to your shareholders, customers, and employees.
In KPMG’s analysis of the “Great Recession” of 2008-09, they observed that “a select group of companies maintained profits and managed to grow revenues and margins, despite falling demand. By acting early, they managed to sustain nearly all of their shareholders’ value, while the Total Shareholder Returns of the poorest performers fell by more than 23 percent.”
The winners back then took cost actions to preserve margins when sales slowed. They also used the downturn “to plot new growth strategies— investing in technology, snapping up new assets and shedding businesses that no longer had sufficient growth potential,” writes KPMG.
To be a little bold: Recessions aren’t about bankrupting your business but making sure competitors lose their foothold. So, how do you make the most out of the recession? Your business is meant to succeed. Make sure the current challenges don’t change that.
To help you, we have surveyed the best recession advice available on the web. Our conclusion is that two reports from American Express and KPMG contain the most relevant advice – on a high-level as well as practical level.
Before we get started, we want to state a few reservations. Above, we described a classic recession. If there ever was such a thing as a standard recession, the one we have ahead will most likely be one with many deviations from the normal.
KPMG writes that “this downturn is unfolding in ways we haven’t seen before. Consumer confidence has hit an all-time low, but consumption remains healthy. Demand for air travel— usually one of the first industries to suffer in a slump—is more than airlines can satisfy. Unemployment is at the lowest rate in decades and household balance sheets remain strong. Supply constraints—both labor and material— remain bigger factors than weak demand. This is unlike 2008, 2001, 1992, 1980, or 1973. So, this downturn may be unlike anything we have seen before.”
Above we compared a recession with a hurdle competition, while we also stated that the recession ahead is likely to pretty unique compared to recent recessions. To stay with the hurdle metaphor, a company needs to build scenarios for how to act in the face of yet unknown hurdles. KPMG writes that the “downturn is just the latest external event that illustrates the need for agile forward-thinking strategy development.” A more hands-on approach would be to frequently discuss how the company should act given scenario A, B and C.
What costs will accrue over the next six months? What and how long-lasting obligations does your company have? Do you know the expiry dates of important contracts, and are you alerted in advance? Tools for budgeting, forecasting and contract management are there to help you. Use the data available to do simulations for different scenarios and identify cost drivers.
Even though a recession is looming, CEOs and CFOs often drag their feet hoping that the recession will not hit their company all that much. Agility belongs to those who act preemptively while they still have time to take well-considered action. KPMG’s advise is clear: Don’t wait until margins start to fall. This extends to financial costs as well: Don’t wait with restructuring debt until you desperately need to.
Most likely, your current supplier contracts were signed to grant you access to products and services to help you grow. When circumstances change and growth is put on hold, it may be time to renegotiate several contracts, even ahead of expiry date.
At House of Control, our rule of thumb is that 10 percent of spend can be eliminated through prudent contract management – simply by eliminating surplus supplies you didn’t know you were paying for. But there are more ways to save than to cut and renegotiate: You can also shop around. Especially in a time of recession, there are more vendors ready to do business with you at lower prices.
Remember how Covid suddenly made Zoom and Teams household names? These platforms for virtual meetings had been around for a long time, but with physical meetings banned we had to change our habits. Likewise, there are many apps readily available to make manual office-work cheaper and more efficient. This recession can become the place in time when your company changed before the competition. Most likely, the investments needed are more about changing habits than prioritizing funds.
A “war chest” of cash in the bank is useful not only as a defensive measure. A healthy liquidity situation is often a prerequisite to act proactively in a downturn, for example invest in future growth or acquire other companies.
In practice, strategy is as much about what your company does not do. Are there groups of customers, geographic markets, industries and product areas where you would be better off to pull out? Do it! The first losses are often the least hurtful. A recession is the right time to sharpen the strategic focus by doubling down on your best customers.
“A downturn is a good time to prune the portfolio—and to pick up assets that can deliver new sources of growth,” says KPMG.
Your company’s future success depends on the quality and enthusiasm of your team. When looking for talent you have probably experienced how few really good candidates there are around. We believe that is likely to continue right through the remainder of the recession – and more so afterwards. Now may be the right time for measures that strengthen loyalty among the key team players. If you strengthen the comradeship now, chances are people will commit for the long run.
This one comes from the American Express article: If you're still searching for how to cut business costs, you can assess the current usage of your employee's experience and skills. You could be losing money by employing people in the wrong positions. Give responsibilities to the employees with the most skill and efficiency in those areas. Don't use expert salespeople for word processing or "numbers" people for design functions. It's often necessary for one person to be responsible for various tasks, but consider exchanging some of those tasks with another individual who shows greater efficiency.
In former times and in less affluent societies, more people share the same space. Companies can learn a lesson from this: If you have surplus space, invite in one or more smaller companies to share your offices. This advise is related to the two previously mentioned advise: More people and ideas in the same place – especially in a time of need – is the kind of X factor that can change the future of your company.