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How To Grow A Business In A Recession A Guide To Surviving EXECUTIVE SUMMARY
Eight rules to beat a recession: 1. Accept that the world has changed (get over denial quickly) 2. Cut costs fast and deep (it’s seen as a strength, not as a weakness) 3. Understand that a recession is a wonderful time to grow a business (once you understand what has changed) 4. Focus on private money for working capital (it hasn’t anywhere else to go) and be prepared to go back repeatedly for more capital (leave yourself enough equity headroom to do so). 5. Identify the specific opportunities a recession offers: a). To remove weakened partners or shareholders Ignore doom merchants and neigh-sayers – the market doesn’t go away for long and recession produces real opportunities Above all, develop rapidly new products and services that are tailored to the new conditions. Identify the long-term trends that will affect your business growth as the national and global economy recovers Accept That The World Has Changed Humans find it difficult to adjust to violent and extreme change. Those who adjust most quickly to new circumstances always gain a significant competitive advantage. When severe recession strikes the natural reaction is just to ‘press on as before’ and to attempt to pursue ‘business as usual’. There is a strong desire to wait to see just how bad things are going to get. This is a form of denial and is a mistake. The global recession that started in 2008 was caused by a collapse of the global banking system, an unprecedented event so unexpected and shocking that it would be hard to imagine a worse economic catastrophe. Digesting the scale of this disaster and internalising it fully is the key to survival. In early 2009 the economic outlook is so dire that many businesses have to completely reconsider what they do and how they do it in order to survive. Cut Costs Fast And Deep You know you’re in a recession when even those customers who have no intention of paying you, stop placing orders. This old joke sums up the point at which most managers realise they are in the middle of a dire situation. Before you get to this point, you should have shed all unnecessary costs. In good times optimism prevails and almost every business overlooks inefficiencies. Members of staff who are only marginally productive are tolerated, new equipment is purchased automatically and managers’ spending discretions are set at a high limit. In the bad old days (the 1960s and 1970s) a small or medium-sized business feared market reaction to cost cutting because of the damage such an action would do to their reputation. Today cutting costs is seen as a strength, not a weakness. Cut staff costs, office expenditure, capital and equipment costs as rapidly and as deeply as possible. A Wonderful Time To Grow A Business Recessions can be a wonderful time to grow a business once you understand what has changed – and once you realise that the normal ‘flight controls have been reversed’. If you re-brand your products or services rapidly and re-price them in recession mode you can start to increase your market share during a recession, even while your market as a whole may be contracting. You will have noticed that in my cost cutting recommendations in the last section I did not include cutting back on advertising or promotion. Most companies make the mistake of cutting advertising and promotion in a time of recession, although it has been clearly demonstrated that, with the right offering, advertising and promotion are particularly effective during economic down turns. THE RIGHT OFFERING is the key qualification in the last paragraph. The offering during a recession has to be unique, appealing and re-priced for a recession. Given these factors, advertising and promotion works precisely because your competitors are likely to be cutting back on their promotional spending, and you should be able to buy advertising space/time and promotional activity very advantageously.
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Working Capital When banks are recalling overdrafts and refusing new loans, many good and solvent businesses find themselves running short of cash. Cash is always king in business and owners and managers must identify new sources of working capital quickly. The first call for extra cash must be the existing owners and directors, but additional capital is often not available from these sources. Thankfully, recession means that many individuals with private capital can’t find profitable homes for their money. Stock market investments become perilous and volatile property values offer no hope of a return in the short or medium-term future. There are many private individuals with funds available to invest. These ‘angels’ can be found through accountants and financial advisors who are always on a lookout for opportunities for their clients. Small and medium-sized businesses will have to be prepared to give up equity in exchange for working capital (either a high-interest-bearing loan or an outright purchase of equity) but well-established businesses with a solid profit record (and new businesses with an outstanding offering) should not find it hard to raise moderate working capital in a recession. Be prepared to part with equity (or make new share issues) on an on-going basis. When recession strikes, many opportunities present themselves that are rarely available in good times. The need for additional working capital from private sources may provide the opportunity for some shareholders to buy out others. A financial crisis can often remove blockages in share structure. Other opportunities include the ‘perfect excuse’ for getting rid of staff who might prove difficult to remove in good times. Firings and redundancies are expected in a recession. Cease the opportunity. If you can, use the circumstances of recession to renegotiate your overheads – e.g. renegotiate your lease and rental terms on your premises. Landlords find it much more difficult to replace tenants in bad times and will themselves be more flexible. If possible move to lower-cost, temporary-rent premises. Fiscal flexibility looks good in a recession. Remember that a recession is a perfect time to hasten the demise of competitors. In every commercial field there are competitors who are too weak to make much profit for themselves, but are still serious ‘spoilers’ in your marketplace. You may be able to force such competitors out of business by pricing your ‘recession products’ aggressively enough, or you may be able to take over their business when they run short of working capital. A recession is the ideal time to clean up splintered markets. Finally, don’t hesitate to extend your own line of credit from your suppliers. The Market Never Goes Away For Long Don’t listen to the pessimists during a recession. Yes, it seems as if everyone stops buying, but markets never go away for long. If the need for a product or a service is well established, it will never go away; it will just slacken temporarily, or in some cases, pause. The question is; ‘By how much will markets slacken and, if they pause, how long will they pause for?’ People have to buy food and energy almost every day. They have to pay for their homes and domestic services regularly and, unless they are exempt, people have to pay their taxes. People also have to travel for work and for family reasons. Given such ‘necessity spending’ businesses offering perceived better value in these sectors can grow their market share during a recession. If your business suffers a spending pause – think housing, cars, furniture, large domestic appliances, non-necessity travel, non-necessity business expenditure – the question is, how long can your clients go without your services or products? Many sectors can pause for a few months, some even for more than a year but if demand in your market goes away for more than eighteen months, then something other then recessionary spending caution may be the problem (e.g. your products may have been made obsolete by a new technology). In most sectors the market returns quite quickly. Develop New Products And Services Just as Detroit is belatedly rushing to produce fuel-efficient cars, your business may also be able to tailor products or services specifically designed to sell well during a recession. If your business is taking a hit, don’t imagine that the world will look the same when the market returns. It won’t. Major recessions usher in new eras with new fashions and new ways of doing things. Imagine you were starting over with a clean slate. Can you think of a product or service that would appeal to your recession-minded customers? If you can, and your worry is that it might damage one of your existing markets, explore ways of launching that product or service anyway. If you don’t, a competitor or new entrant may do it for you. Recessions are excellent times to start a business. A new entrant to a market has that blessed clean slate and will not have the overheads or legacy structures of a business that was established in the ‘boom’ years. Your job is to make your business look like a new entrant. Legacy infrastructure and thinking must go. In it’s place must be new products and services priced as a new entrant would price them. Don’t Take Your Eye Off Future Trends In time of recession many business managers fail to think about the future. They are so worried about surviving that they think the future can be left to take care of itself. The future can never take care of itself. As I said in the last section, major recessions usher in new eras and the business landscape often changes quickly and profoundly during times of economic uncertainty. It is important to keep focussing on the mega trends that are likely to affect your marketplace; major trends are not disrupted or made irrelevant by economic cycles. Trends that affect your business future may include demographic shifts (the ageing of Western populations or the explosion of the birthrate in the developing world). Another trend might be globalization (the pace may be slackening at the moment, but it will pick up again in the near future). Your business might be affected by climate challenge – clean tech (the development of the clean energy sector) looks certain to boom. You might be affected by the accelerating pace of new technology development, or by the revolutions in medical science. During a recession, every business must understand the underlying trends that will shape and reshape its market as it re-emerges.
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