Do you ever wonder what would happen to your business if (or when) the economy experiences another recession? You probably do. Would your business be prepared? Would you be prepared? What would be your plan? At CLM, we work with our clients to implement strategies year-round to ensure that you have the information necessary to make key decisions in both good and bad economic times. In this series, we offer some thoughts on “How To Make Your Business Recession Resistant”.
1. Always (ALWAYS!) have Projections. You can’t get from here to there without a map. Once, maps were printed on paper. Now, they are mostly digital. It doesn’t matter – you need one. The mapping of a business is what I call a Projection (some people use the word “forecast” interchangeably here – there is a difference, but that topic is for another day). Your Projection is basically your business model expressed purely in numbers. This is where you drill down into every corner of your business – purchasing costs, burdened labor-hour costs, occupancy costs, capital expenditures, marketing investment, sales pipeline, and – yes – tax considerations, just to name a handful.
Does it sound confusing? Well, it is – and I help our clients build these every day. But how much more confused will you be without a good projection? How much risk are you carrying by not being able to identify the specific metrics behind your profit model, and to see how that model could change in a period of market volatility or downturn? First, you need to get your map drawn up; then, you need to add to it the ability to easily run and analyze scenarios reflecting different business conditions. Have you (or your professional) analyzed the effects of the new tax law? Have you considered the possible impact of a much higher minimum wage in your state? What if interest rates rise another three points? What if your segment of the economy shrinks by 10%? Or 20%?
2. Diversify (but don’t go crazy with diversification). Diversifying your product lines, which is another way of saying, “don’t put all of your eggs in one basket,” is often a great idea, but sometimes it is a terrible one. You need to determine whether your business has a clear need for innovation, or whether it is much more important to focus your energy on being the best at what you do. Many business owners are entrepreneurial types – and that is a wonderful thing – but they can run into serious problems by investing heavily in a new idea before adequately proving that there is a market for it. Those problems can turn into disasters if the broader economy weakens.
How do you manage that risk, without giving up on new ideas? These decisions are hard and require discipline. If (when) you think you have a great idea that will open doors to new and different customers, meet with your advisory team and figure out a strategy for how to approach it. Also, do this next thing:
3. Know Your Customer (“KYC”). This is one from my banking days, but it applies to any business. At the banks I worked for, we always took KYC seriously, for obvious reasons – if we lent money to high-risk customers, we were going to have losses. So, take a hard look at who buys from you, and what THEIR business risks might be. Which (and how many) of your customers would be among the first to drop off if the economy goes sour – or if a particular segment of the economy goes sour? What would the loss of those customers mean to your business in terms of Revenue, Profit, and Cash Flow? What would it mean to the staff and payroll that you are carrying?
Here is a great reverse-segue back to Always (Always!) Have Projections. Consult your key advisor to help you run those numbers now, before a recession comes, so that you already know what amount of business you can depend on to ride out a bad economic wave, and so that you can plan for overhead cuts (strategically, not in a panic) if they become necessary.
4. Seek great (not good) advice. Finding guidance that is great, not merely good, requires an advisor who brings financial expertise, experience, AND an exceptional level of personal care. This may mean that you need to look outside of your traditional professional service provider, who may not be able to devote the necessary time and attention to you and your business. Remember, when we think about “recession-proof”, we are contemplating the difference between survival and failure of your business.
Check back with us for Part II of “How To Make Your Business Recession Resistant” where we will explore topics such as:
- Manage Your Cash Flow (Intelligently).
- Pay Your Employees for Performance (No, Really, I Mean It).
- Communicate Efficiently (and Often).