Current economic analyses and reports all agree on one big possibility for 2023: Recession.
While no one wants to hear that R-word, economic uncertainty in 2023 seems unavoidable at this point. But what exactly is a recession?
Despite its alarming definition, however, a recession is a natural and, in most cases, inevitable part of the economy.
What exactly is a recession?
The receding in economic activity is what economic analysts refer to as a recession, precisely when this receding continues for two quarters in a row. The metric used in quantifying recessions is GDP (Gross Domestic Product) which refers to everything that is made and sold in an economy, including both goods and services. Therefore, a recession means that the economy is declining, or not performing well.
What is certain is that the economy or the GDP value will eventually go back up again.
A period of economic downturn can be very difficult to cope with. Business closures and job losses are often a result of a slowing economy, but this doesn’t need to be the case for all, especially if businesses plan for such an event and potentially come out stronger.
Here are eight tips in preparing for – and navigating – economic uncertainty.
1. Realize the Opportunity
When times are tough, companies can conserve cash and play things safe. This opens up opportunities for smaller and more aggressive businesses to find their place in the market and benefit from less competition. It’s why newer and smaller businesses have more opportunity to develop in a period like this. This partly depends on what your product is or what type of service you provide, but it can be a unique opportunity if you know how to benefit from the changes.
Several companies that we know today as giants in the market started off during some type of economic downturn. These include Netflix, founded shortly before the dot-com bubble in the early 2000s, and Airbnb, founded in 2008, shortly before the Great Recession.
2. Keep Cash
Reviewing your expenses and focusing on your cash flow is the most important strategy in preparing for, and coping with, economic uncertainty. Having cash, or cash equivalent, is crucial during an economic downturn, so businesses should look into reducing cash going out, getting additional cash by selling unnecessary assets, or raising investment dollars.
3. Review your Suppliers and Partners
It’s important to conduct a detailed review of who your suppliers are and their financial health. Losing a major supplier can have profound effects on your business. It’s important to understand and anticipate what their challenges might be and be prepared to deal with them, and it’s always a good idea to communicate with your existing suppliers and partners to set expectations on how your business will likely perform in order to help mitigate uncertainties.
A review of your suppliers also includes attempting to get better rates if possible, meaning negotiating a better deal with an existing supplier or changing to one that would allow you to manage your costs better.
4. Investigate New Markets
During economic uncertainty, your competitors, especially if they are large corporations, may stand down, become more conservative or fold. This will be the time for you to claim a bigger market share and investigate markets that you would not have otherwise been able to reach due to intense competition.
An acquisition may be able to give you access to these new markets if you are willing to invest more aggressively. Alternatively, launching new products and services will give you access to a new market which can help you cope with the financial downturn by bringing in more cash. You could also double down on your most profitable products or services to increase your cash flow while taking a less risky approach.
Netflix is a brilliant example of this strategy, successfully executed during the Great Recession. The company introduced the streaming service as their new product in 2008, and it was this innovative move that kept them going while their competitors struggled to keep afloat.
5. Consider Digital Transformation
Digital transformation involves the adoption of digital technology in your operations and can boost your efficiency tremendously. This translates into reducing costs, which is what your business needs to achieve in order to cope with the impacts of an economic downturn.
Digitally optimizing your organization also has the benefit of giving you wider access to a customer base and may help you improve the customer experience. Therefore, it is a good investment to make.
6. Improve Operational Efficiency
Making sure your processes are lean is crucial in preparing for economic uncertainty. It goes without saying that eliminating waste and maintaining your production or service requirements while using less resources is a logical strategy.
If you are a manufacturing business this could include ensuring overproduction is not an issue and that you have lean manufacturing capabilities. For other types of businesses, this may also include checking in with your workforce and making sure your team is appropriately trained and positioned to weather the storm. Investing in employee training, engagement, and retention during a recession can help your business thrive in the downturn.
7. Recession Proof your Workforce
A recession could, in severe cases, mean layoffs and job losses. However, there are ways to avoid that as a business owner, and instead elevate your team’s performance. If you have a looming downturn, it is better to consider contractors and freelancers as opposed to permanent employees. It is also important to cross-train your team in certain areas to make sure you always have a plan B if an employee leaves.
8. Get Assistance
Keep in mind that there might be financial assistance available for your business through the government. These programs can help you with rent or payroll costs or provide general financial relief for your business.
During the pandemic, for example, the Government of Canada provided financial relief programs to support businesses, including the Canada Emergency Wage Subsidy and the Canada Emergency Commercial Rent Assistance program.
Recessions can be scary and unpredictable, but they are also a normal part of the economic cycle. While it is difficult to navigate different strategies that may help cope with a downturn, there are things people and businesses can do to deal with the negative outcomes. By noticing the signals and proactively strategizing, you will not only survive this period of uncertainty, but thrive through it.