Avoid the 5 Typical Fatal Responses to a Recession - How to Recession Proof Your Business

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First you need to be prepared. The economic outlook may not be to our liking, but that means you need to take stock and review your options, so you can meet the recession with proactive strategies rather than panic when difficulties arise because you just kept doing business as usual.

This article will provide a realistic look at current economic conditions and ensure you are fully alerted to the dangers of responding to the recession in the way most business owners respond – the wrong way and often in ways that are fatal to their business. It is almost certain that many businesses will fail from the effects of the recession that is going to get far worse before things get better. But if you have the quick wittedness of one of the characters in the following story, you will not only survive the recession, you will have the opportunity to thrive. You will be able to get your business under control and make it work for you, instead of you having to work for it to keep it going at a level just above survival.

The deepening recession represents danger to most small businesses and it can strike fear and doubt into any business owner who is already operating with stretched resources and marginal profits. You may even feel like the two hikers who were on a trail high up in the North American mountains, who saw a bear enter their trail a fair distance away, but heading in their direction. The bear saw them and started running towards them. One of the hikers immediately started running in the opposite direction. But the other runner sat down and opened his backpack, pulled out his running shoes and started to put them on. The first hiker, aware that his companion was not running with him, turned to look back and was incredulous at what he saw. He shouted back to his companion, “What are you doing. You surely don’t think you can out run that bear in those?” His friend replied, “No I don’t. But I can out run you.”

That story illustrates the type of quick and innovative responsiveness you will need to survive the recession. The certainty is that you won’t escape its devastating impact unless you are stronger, faster and more agile than your competitors. Then, you will outlast them and out run your own demise while you watch them falter and fail.

The 5 Fatal Responses

Before we start talking about the opportunities, let’s see how most people respond in the wrong ways to the effects of a recession, so that you can be forewarned and avoid those responses. In a recession, the impacts are usually felt in the following ways:

1. Pressure on sales – customers tighten spending which impacts on sales for the market in general.
2. Costs increase – recessions are usually coupled with inflation which pushes up the prices of essential commodities and services
3. Cash flow tightens – ability to borrow money is more difficult because of tougher lending criteria and cash flow is restricted by lack of funding and also by slower paying debtors
4. Competition will get more fierce and dirty – as the market tightens, competitors will react in ways that impact on you and some of their methods may not be fair or ethical
5. Employees tend to get more demanding as the recession affects them – inflationary pressures will lead to wage demands.

Typical responses to these recessionary impacts are as follows:

1. As the market demand falls, driving down sales, the typical response is to reduce prices to try to remain competitive and attempt to maintain sales at normal levels. The result of this strategy, when all competitors reduce prices in a falling market is that each market share remains the same. However a smaller market means lower sales volume at lower profit margins for everyone. This is a double whammy, as when you reduce prices you need more sales to achieve the same profits as before. Now you have lower sales and lower profits to keep the business going. The weakest fail first in this scenario, but everyone loses profit ultimately.
2. As costs increase, the typical response is to reduce expenditure. Rightly so. However, it is often reduced in the wrong areas. Marketing and advertising expenditure is often seen as discretionary and expenditure is often cut here first. This compounds the problems of shrinking market demand. If your advertising works at all, cutting costs and reducing your advertising will lower sales more. If you have already lowered your prices to remain competitive, you now have a triple whammy.
3. Now, with cash flow tightening up along with lower sales, you are affected by your customers’ cash flow issues as well. It’s a flow on effect that started with the first person who said, “There’s a recession on the way. We’d better stop spending.” You are tempted to extend credit to help out and to keep sales volumes up. This leads to even greater cash flow issues as you buy stock or use labour to produce the sales revenue, but you can’t pay your bills on time because your debtors aren’t paying you on time. It’s only a matter of time until your cash flow dries up completely.
4. Competitive pressures lead you to cut costs further. The next area to suffer is product quality and along with it, customer service. You try to source cheaper materials and possibly outsource part of the work to reduce your costs. This leads to increased customer complaints and returns. Your existing supplier relationships are affected and your new suppliers struggle to meet your quality standards and normal turn-around times. Eventually, your sales suffer further because you can’t meet customer expectations and your customers continue to depart.
5. The compounding impact of the reducing sales and possibly, changes to production methods, means that you end up with not enough work to keep your people busy. They start trying to look like they are busy without being productive. Meanwhile, they are feeling the strain and are starting to make noises about pay rises. You decide you have to let some of them go to keep your costs under control. If you offer voluntary redundancy, it’s not the ones you want to lose that decide to go. Whatever you do, you lose some good people. This makes it increasingly difficult to maintain quality and service standards. Plus, when the economy turns around, you take much longer to make up ground because of the talent and knowledge that has left your business.

With each of these responses compounding the problems created by the recession, you will be in for a very difficult time, even if you survive, if you do things in the normal way of most business owners. You are continually behind the eight ball playing catch-up. If you want to not only survive the recession, but also come out of it better off, you need to do things differently. To be able to respond positively and proactively to the recession, you need to have your business in tip-top shape. If you are already feeling the strain, you need to take immediate remedial action.

Put on Your Running Shoes

Like our quick witted character in the bear story, you need to get yourself into the best state to cope with the bear economy we now see heading down the track toward us. It’s time to put on your running shoes and move faster and with greater agility than your competitors.

It really doesn’t matter that we are in a recession. To be really successful in business at any time, you need to apply the proven principles that lead to business success. Both well respected research studies and personal experience show that there are 7 key principles that successful entrepreneurs apply and if you work on those principles consistently, you can keep winning in your quest to establish and run a successful business. The critical difference between the successful and the normal business is that successful entrepreneurs develop their businesses into sustainable, profitable operations that work without them having to be involved in the day to day running. That factor is critical, because until your business works without you, you still have a job and the business controls you. However, when your business finally does work without you, you have built a value and wealth creation vehicle. That’s the true definition of entrepreneurship. It’s putting your business on autopilot so it works profitably and successfully by itself, without you having to be involved in day to day decisions or operations. In a recession, the same approach applies. Your focus must be on building a strong, agile business rather than on reacting to pressures created by the recession. You need to pre-plan and prepare for the impacts of the recession and determine how your business will respond to put you in the best position to take advantage of the opportunities others miss because they are continually playing catch-up.

For a true entrepreneur, the business is the product. The business is like a machine that produces the products or services. The only reason for the entrepreneur to work in the business is to discover how the business works best and to create the systems that will become the foundation for future growth. That should be the goal of any business owner starting a business, and once that job is done, it is time to step out of the operational processes and get into the driver’s seat where strategy and direction become the priority. These seven key principles are outlined in the book, The 7 Keys to Unlock Your Business Profit Potential, which clearly spells out how the most successful business got to the top and stayed at the top.

If you keep doing business the way you have always done it, the same way the vast majority of business owners who remain trapped in their business do it, you will always live with stress and frustration and never have the freedom to enjoy life the way you really want. In a recession, it only gets worse. The only answer is to make the transition and put your business on autopilot following the 7 key principles. There is no other way to succeed.

In a recession, instead of cutting your prices to remain competitive, you need to add value. You need to operate counter intuitively and go against the tide of competitors who are making things more difficult for themselves. You need to offer your customers a clear alternative to dealing with the “me too” competitors who are almost clones of each other.

When you offer more value, you can also increase your prices. Your products or services then have more appeal and you insulate yourself against the loss of customers. Perhaps you may lose a few who would rather pay less, but the impact of increased profit margins that your price increase creates means you can lose a good few customer before your profit dips below the level it was at before. The other effect of this approach is that you attract a less fickle type of customer who has a greater appreciation for the quality and service you specifically offer, that they can’t get from your competitors. You can actually be more selective about choosing your customers and you will attract even better quality customers as a result. This will insulate you further from the reactions of competitors, plus your cash flow will be stronger because of your higher profit margins, lower stock requirements and because your better quality customers will pay you on time, because they are less affected by the economic conditions.

Strengthening your business during the recession has other positive impacts as well. When your competitors fall over, who will be there to help out their customers? Even though the market may shrink over all, you can greatly increase your market share because you have better cash flow than your competitors and can afford to increase your marketing efforts to attract more customers who are looking for a new home. Your growing sales volume means you can actually put on more workers. And there will be more good people available as a result of leaving their old struggling employers and the ones that have collapsed altogether. Now is the time to capitalise on the increase in availability of good people, because they won’t be there when the economy has picked up again.

Often in a recession, there are counter-cyclical businesses that are set up to help others when times are tough. If you are in a business like this, keep your eyes peeled for the ground swell of opportunities coming your way. You need to get your business into top shape now, so you can meet those opportunities fully prepared and ready to take maximum advantage.