Recessions—defined as two consecutive quarters of economic decline—are often caused by unexpected economic shifts. And in the past few years, we have had a lot of them: the global COVID-19 pandemic, the war in Ukraine, the Great Resignation, and the rapidly rising inflation (9.1% in June), as well as the still-increasing interest rates from the Federal Reserve.
By waiting until you are in a recession to plan for its effects, you will be acting when it’s too late. Most organizations suffer during a recession not only because of adverse economic conditions, but also because of uncertainty and inaction. Regardless of your industry, a recession calls for leaders to be both prepared and flexible—a line that is hard to draw when the future feels so uncertain.
As your trusted advisor, Mowery & Schoenfeld is here to help you through this difficult time. Below are six priorities we recommend for company leadership to mitigate the potential damage a recession may have on your organization.
Have a plan
If you have not done so already, now is the time to create a plan. Build a financial model for the likely- and worst-case scenarios. Try to think through all possibilities: What will happen if your largest customer is suddenly unable to pay for outstanding invoices? How will transactions change if your vendors are unable to shop parts? By building extreme downside scenarios, you can outline “if-then” plans with clear decision paths.
If your organization begins to lose revenue, remember that cash is king. Managing your cashflow is essential to your success. Have your department heads help come up with budget reductions by identifying unnecessary expenses. You can also triage payments, accelerate collections, and invoice earlier to have more cash at hand and keep your business secure.
And while we all want to preserve jobs to the greatest extent possible, eliminating underperforming or underutilized performers will protect not only your business, but also your top performing employees. Make a list of A, B, and C players and be prepared to make timely and tough decisions.
Assign decision makers
Following the creation of quarterly contingency plans, you should create an agreed-upon system for making those decisions. If leadership roles are historically shared in your company, talk about how potentially difficult decisions will be made, such as a reduction in force or an inability to pay vendors on time. Try to work through these scenarios and come to an agreement before the situation arises. Then, assign a key decision maker for each area of business in the event a choice or action needs to be made immediately.
Each individual in your organization should have a defined role with an understanding of their responsibilities, but it also benefits your organization to have checks and balances in place. Redundancy increases efficiency, consistency, and accuracy. By having redundant systems in place, you can typically accomplish more—even if your resources are strained.
Additionally, check in with employees to make sure they are saving work to the appropriate location so others can access what is needed.
Even if you are not yet feeling the effects of the supply chain disruption at your company, you should take proactive action. Review contracts with your vendors to see if you can get more favorable payment terms. Also consider a slight price increase to cover the coming inflation or give yourself a buffer for any lost revenue.
Companies that integrate supply chain management systems into their enterprise resource planning can gain value from predictive analytics and automated alerts. By staying connected with your suppliers, production facilities, warehouses, and sales organization, you can foster a network that’s communicative and avoids volatility when disruptions occur.
Similarly, if you can take some time to identify where the weak spots in your supply chain are—where the most delays have come from or where prices are the most volatile—you can try to find alternatives to these suppliers.
It might be advantageous for your organization to position yourself as a strong competitor—even in hard times. Define how you can and will outperform competitors through and beyond the crisis through M&A roadmaps and product/service customer investments.
Remember, though it may not be soon, the economy will recover. Prepare for that bounce back with marketing plans and “if-then” plans that can be implemented when the time is right.
Your employees, clients, and customers will be looking to you for how you respond to the current crisis. You need to anticipate what comes next week, next month, and even next year to prepare your organization for the changes ahead. You need to delegate and trust your people as they make and are affected by tough decisions while providing proper support and guidance to lead them through these challenging times.
Companies who thrive in a tough economy will do so because leadership and employees were able to come together. Be open and honest with your team members about the choices your organization is making and celebrate victories when they happen.