1 Challenge
- “My country is in recession and my business is suffering.”
2 Questions
- “How can I manage my business during a recession?”
- “How can I prevent it from suffering – or worse, going under completely?”
3 Ideas
- They Managed their Profitability
- They Managed Their Liquidity
- They Retained Their Best Customers
Between March and October 2020, the Indian economy went into a recession. The reason is pretty obvious – the COVID-19 pandemic and the lockdowns that followed. According to CNN, this was India’s first recession in nearly 25 years.
India continues to remain one of Asia’s – and the world’s – largest economies. However, 2020 took a toll on thousands of businesses all over the country. Companies of every size and in every industry suffered from the effects of lockdowns, particularly in terms of lower employee productivity, reduced demand, and falling sales. Many businesses had to shut their doors permanently.
However, a few lucky – or smart, depending on how you look at it – companies managed to survive, and even thrive. How?! What did they do that other companies didn’t? How did they manage and grow their business in a recession economy?
Here are 3 things that such companies did right. You can also manage and grow your business during a recession by following these best practices.
1. They Managed their Profitability
It seems strange to talk about profits and profitability in a recession economy. However, companies that successfully get through a recession manage their profitability before the recession even sets in.
A recession could affect any industry or company. Even when the economy is healthy, most companies have a very small margin for error. This is probably true for your company as well. Furthermore, when a recession hits, you know that even a small decline in revenues could wipe out your entire profits, and affect its future profitability. That’s why it’s important to manage your profitability at all times.
Create a contingency plan to ensure that your business can produce marginal, short-term profits, even if there’s a drop in revenues due to a recession. Don’t sit back and relax when profits are healthy. Imagine a future when profits may not be healthy, and think about what you can realistically do to tide you over until the tough times pass.
Here are some other tips to manage your profitability and keep your company afloat during the tough times:
• Consider optimistic, realistic, and worst-case revenue scenarios, and create revenue and profit forecasts for each.
• Set up an early warning signal system to alert you to take necessary actions. Set up thresholds to quickly identify if your backlog is shrinking, if the sales pipeline is shorter, or if orders have dried up. Create an action plan for each eventuality.
• Adjust or reduce discretionary spending at more frequent intervals.
• Assess revenues versus expenses, and find ways to increase the former and reduce the latter.
• Devise a plan to inform bankers and investors in case of a downturn, and to ensure that you will have access to additional funds if required to maintain business continuity.
• Also create an action plan for damage control.
2. They Managed Their Liquidity
A recession can be very ******* an organisation’s liquidity, because maintaining healthy liquidity can be difficult when you have to deal with negative growth, fewer customers, and smaller revenues. However, the task is not impossible. You can manage your liquidity by keeping track of your cash flow.
Monitor cash flow, find ways to increase it, and always maintain a cash flow reserve. Also monitor receivables against payables. Maximise cash flows by narrowing the time gap between sales and outlays for advance costs, such as inventories.
Reduce the credit period you offer to customers. Ask for upfront deposits or partial payments, and offer future discounts to customers who pay promptly. Look for suppliers who offer favourable payment terms and discounts. Reduce your cash conversion cycle days, i.e. the time it takes for payments to come in from customers against the days when supplier payments are due.
Also consider and control other levers that affect your cash position and liquidity:
• How much inventory should you buy to run the business, and how much should you keep in reserve? Can you keep this reserve amount as low as possible?
• Do you have any loans or other liabilities? Can you ask lenders for more favourable terms or payment extensions?
• What are your overhead costs and how can you reduce them?
• What are your staff expenses and how can you reduce them without affecting workforce productivity or morale?
For more ideas about cash flow and profitability, read our Tuesday Tips article: 3 Ways to Improve Business Cashflow and Profitability.
3. They Retained Their Best Customers
Businesses that survive tough times do so because their loyal customers stick with them through thick and thin. Are you doing enough to retain your best customers? Identify your highest-margin customers or customers who have been with you the longest, and do a self-assessment:
• What you are doing right for them?
• Why are they still with you despite a recession?
• How has your relationship with them evolved over the years?
• What can you do to maintain and strengthen this relationship even further?
Build on the strengths, capabilities, skills, and qualities that have made you indispensable to these customers. Accordingly, develop a game plan to retain other customers in the event of a recession in future. If there is a dip in business, shift resources to retain high-margin customers, and look for new ways to add more value for them. You will find that these strategies will yield better and more enduring results than simply cutting costs across the board.
Of course, this doesn’t mean that you don’t cut costs at all. You should review your cost structure to identify which costs you can cut. However, you should do this strategically, and with an eye on the future. Cut costs that can save you money, but not affect your output or customer relationships. Identify cost inefficiencies, and remove costs that no longer create value for your firm or customers. Also consider outsourcing non-strategic functions to save money without sacrificing client value.
Conclusion
A recession can be a daunting prospect for any company. Even large multinationals worry about falling revenues and constrained profits. However, you can manage your business in a recession economy if you plan in advance. Don’t let economic challenges take you by surprise. Develop your planning skills, and leverage the 3 strategies explained here to manage the crisis and get through on the other side – with flying colours.
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