Surviving Recessions
Wednesday, May 13, 2020 at 10:00AM 
Permanently Impaired, or Pit Stop
It's almost 12 years since the world economy went backwards long enough to be labelled a global recession. On average, there's been one every nine years since WWII. You would say that this one was overdue. Even more so at the individual country level, where there's about one every six years or so. If you are 40 years old now, expect three to four more before you retire.
What can we learn from this?
Three characteristics of downturns
Recessions tend to be shorter than expansions. Most last little more than a year. Good times can persist for up to a decade. Recessions are also discriminatory. Some firms fall hard; others get windfalls — like restaurants versus supermarkets in the Covid climate. Recessions favour strong balance sheets. If you enter the downturn with low debt and plenty of cash, you are more likely to make it through. These attributes suggest tactical options.
Three survival strategies
A downturn creates a sense of urgency. Some resources are now under-utilised or lying idle. Some will be fat you put on during the good times. For others, demand has simply disappeared. The urgency forces hard decisions you might otherwise have put off.
Look across the entire firm for opportunities. Eliminate waste, restructure work practices, rationalise suppliers or target the customers most likely to be there on the other side. You won’t have a lot of time. Formula One drivers don’t just pull into the pits for fuel. In that brief moment, the entire team makes sure the car is in shape to get back on the track. Recessions might last longer than a pit-stop, but they’re not as long as the race you're in.
How does the recession discriminate against you? If you rank your product range by margin, cost of capital, cash flow and prospects, which one warrants the most support? List current practices and new initiatives by ROI. It will clarify which activities are best placed to either get you through, or to outperform post-downturn.
Lastly — and by no means least — there’s financials. In a downturn, cash is again king. Firms don’t go broke when they don’t make a profit. They go broke when they don’t have any money. In making any decisions on where to focus your resources, aim for products and customers that produce the most cash the most quickly. Review how far you’ve strayed from Cash Flow 101. Tight management of payables, receivables and inventory are at the core of the financial pit-stop. They tend to lose priority in the good times. Get them back into sharp focus. And maybe keep them there.
Look around
Good financial management puts other strategies in the frame. If you haven’t got enough activities that can survive or thrive, who has? The discriminatory nature of recessions means some competitors will struggle more than others. Is this the opportunity to buy the capability that you don’t have? Don’t limit your survey to competitors. Channel partners, suppliers, even some customers, can become more than just fellow travellers.
Recessions present both challenge and opportunity. Use the urgency to create change; take advantage of the uneven impact; return financial management to front and centre.
Reader Comments (7)
As you suggest, we are restructuring work practices. One of the odd findings has been that some people are better in the temporary role they've been given than they were in the usual job. They've been happier too and more productive.
Don't like the idea of another four recessions. Better use this one for practice.
Probably got enough cash flow to get us through but I don't think this'll be short pit stop.
Turns out one of my salesmen is pretty good at accounts receivable. Never was before this. I think there's a chance he still will be after we get through it.
Good piece Alan. I have been advocating since the beginning of our lockdown here in NZ that this time is a great opportunity for readjustment and consider what and how we do things in the future and make change for the better as we slowly move forward. Our clients and close business associates have all began the process of reassessment. Love your work!
Excellent article thanks Alan - encouraging tips to work on whilst in a small entrepreneurial biz like Vizymates.com.au - we don't care about profits more about reaching the critical mass to save our kids from being hurt on roads. With our limited cash we are ramping up our marketing for return to school ...also discovered the right type of agents who contacted us via one of our adverts in NRMA's Open Road - our target market is grandparents who are keen to keep their young ones safe walking to/from school. Thanks for sharing your deep wisdom and knowledge with us. Love Patrick's cartoons - check out my thanks to you on my Facebook. Cheers, Susan.
Thanks for sharing