An Expert’s Guide to Recession-Proof Businesses
“Maybe the bonuses are smaller this year, or maybe they move to more of a remote work environment and close some of their physical offices to save money on rent.”
Dr. Steve McKeon, Associate Professor in the Department of Finance, Lundquist College of Business, University of Oregon
The global economy is always in flux, and the threat of a recession can be daunting for business owners. However, with the right strategies and preparation, it can be possible to ensure a business is ready to weather an economic downturn. With the market currently feeling uncertain, now is a great time to put plans in place to help your business stay afloat.
A common question many are asking is are we currently in a recession. “Recessions are defined by the National Bureau of Economic Research,” shares Doctor Steve McKeon, associate professor in the Department of Finance at the Lundquist College of Business at the University of Oregon. “The NBER hasn’t technically declared this is a recession. But I can tell you that most people on the ground would say that we are in a recession. So, I guess the answer is it depends on who you’re asking.”
Recessions have several distinguishing characteristics, particularly for businesses. “Companies will see a reduction in economic activity. Typically, they will also see revenues slow down and maybe even shrink depending on their industry because consumers are spending less,” McKeon notes. “Very frequently, recessions are accompanied by headcount reductions as businesses lay people off. Subsequently, unemployment numbers typically go up.”
The type of business, as well as the stage it is in, can significantly affect its ability to remain viable during an economic slowdown. “Small businesses that aren’t cash flow positive are in the most danger in recessions because they can go out of business if they can’t raise more capital,” warns McKeon. “Big businesses, Apple or Google, aren’t likely to go out of business in a recession. Their profits and revenues may go down, and they may have to lay people off, but there’s not really a survival issue for them.”
Universally, companies may need help to secure the capital they need during recessions. “It becomes harder to raise money. So businesses reliant on external capital, like startups, recessions can be really hard on them. It is essential to ensure they preserve cash because it can affect their survival,” says Dr. McKeon.
Keep reading to learn what Dr. McKeon suggests every business should do to be recession-proof.
Meet the Expert: Steve McKeon, PhD
Dr. Steve McKeon is an associate professor in the Department of Finance at the Lundquist College of Business at the University of Oregon, an Inman Research Scholar, and the academic director of the Cameron Center for Finance and Securities Analysis at the University of Oregon. He is also a partner at Collab+Currency and focuses on crypto assets.
Dr. Mckeon actively contributes to projects focusing on blockchain technology and digital securities initiatives. His current research focuses on blockchain technology applications in financial services, asset tokenization, and other technological disruptions within capital markets infrastructure. He provides services to industry participants such as venture capitalists, legal counsels, and exchanges. He earned his PhD in finance at Purdue University Daniels School of Business.
Steps to Take To Recession-Proof Your Company
All of the steps that McKeon recommends boil down to one simple principle. “The number one thing is cash is king. When you get into a recession, you want to do everything you can to preserve cash,” he advises. “No one knows how long a recession will last or how deep of a recession it will be. There are all these questions and a lot of uncertainty in the markets, and the only guard against it is cash.”
Here are McKeon’s recommendations on keeping cash on hand to ensure a business weathers a recession.
The easiest way for a business to keep cash on hand is to simply spend less. Cutting costs can look a lot of different ways. “You’ll see companies reining things like private jets or expensive travel. Maybe the bonuses are smaller this year, or maybe they move to more of a remote work environment and close some of their physical offices to save money on rent,” suggests Dr. McKenon. “Operational types of expenses are another place where business owners can reduce costs,” he adds.
Marketing budgets can be adjusted to less expensive methods, such as email campaigns versus paid ads. Expenses such as insurance, legal fees, and accounting can be reevaluated to see if there are cheaper alternatives. Unfortunately, reducing operational costs can also look like reducing employee benefits, temporarily reducing salaries, or cutting the number of hours staff work.
A hard part about economic downturns is that, like it or not, with reduced demand and consumer spending, businesses will need less staff. By reducing the number of staff working at a company, owners will be able to reserve more capital to stay open longer and ensure that they have the right amount of employees for the current business need. “Maybe this is the moment where a business needs to lay some people off, particularly if they have been very aggressive in hiring,” says Dr. McKeon. “Pretty much every major tech company has announced layoffs at this point. The primary reason they’re doing that is to cut costs because their revenues are going down.”
While layoffs will help with the bottom line, they can have a detrimental impact on employee morale and performance. Downsizing can cause stress and anxiety in employees who remain at the company, so it’s important to brainstorm ways to support those still employed.
While reducing costs and layoff employees can help businesses retain their cash, they still have to ensure they have money on hand to keep operating. “It is important for companies to make sure they’re properly capitalized. For many companies, that might mean raising money from investors. If it is a smaller business, it might mean trying to do what’s called a ‘bridge round,’ where you get existing investors to put some more money in to make sure the business survives,” advises Dr. McKeon. “Just make sure you’re not going to run out of money in the middle of the recession. That’s the worst-case scenario.”
Raising money can get more challenging during a recession: “Remember, these are cycles. It’s important to understand that this, too, shall pass, and eventually, we come out of recessions. So as we start heading into recessions, you’ll see a lot of businesses trying to raise capital, just to make sure that they have the resources to make it all the way through to the other side,” Dr. McKeon says.
Consumers can be very selective with their spending during a recession, so it can be advantageous for businesses to get creative about how they bring in revenue. “A recession can be a great time to find new lines of revenue, especially if a business is selling something that is considered discretionary,” says Dr. McKeon. “For example, Starbucks can get hit hard in a recession because consumers can choose not to have a $5 latte. On the other hand, Folgers coffee will likely not get hit as hard because people are still going to make coffee in the morning.”
Business owners should carefully examine their services or products and brainstorm new ways to bring in money. During the 2008 recession, popular marketing and email platform Mailchimp created a bare-bones free product offering to bring on more users. This pivot in their offering allowed their user base to soar along with their profits.
Creative Inventory Management
Lastly, during a recession, it is critical that companies look carefully at their inventory and manage it differently than they do when the economy is growing. “Businesses will want to become more diligent about how much inventory they carry. As sales slow down, products could become outdated, which is a recipe for disaster,” says Dr. McKeon.
Other creative ways to manage inventory include implementing a just-in-time (JIT) inventory system, which allows businesses to place orders with suppliers only when necessary and avoid tying up capital in unsold stock. Companies can also utilize supply chain analytics tools to better predict customer demand and reduce stock levels accordingly.
Another option is to optimize the pricing strategy by offering discounts for bulk purchases or creating seasonal sales campaigns. This helps move existing stock and encourages customers to buy more items than they otherwise would have.