Since World War II, the U.S. has experienced 12 recessions, according to the National Bureau of Economic Research (NBER) — an average of one every six years. Indeed, recessions happen, they are more common than most people realize, and most business managers are likely to encounter several over the course of their career.
It’s crucial for business owners and managers to prepare their organizations to survive, and possibly even thrive, through the next recession, whenever it comes. Here are 15 actionable ideas that have helped protect many companies in various industries during past recessions. These strategies may not all be appropriate for any particular business, but selecting the right ones from this list can help to recession-proof any organization.
What Is a Recession-Proof Business?
The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible as declines in gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales. Since 1950, recessions have lasted between two and 18 months, a duration that can be stressful for business owners, since they don’t know how long it will last. A business can freefall without an end in sight — if it isn’t ready.
But not all businesses are affected in the same way or to the same extent during a recession. While nearly three-quarters of U.S. public companies with $50 million or more in annual sales had declining revenue growth during the last four economic downturns, 14% accelerated revenue growth and increased profitability, according to a Harvard Business Review study. The difference in outcomes was largely due to the type of product or service they sold and how they met customers’ needs. Customers still buy essentials during economic downturns, such as food, utilities and other household staples. Additionally, certain services are still in demand during a recession, such as healthcare, automotive repairs and education. Industries that provide recession-resistant products and services are sometimes called recession-proof or defensive businesses.
Businesses not in one of these recession-proof industries can use the following 15 strategies to avoid or reduce the impact of a recession on their operations.
Key Takeaways
- Recessions are a normal part of the business cycle, so it’s important to plan for them.
- Certain industries are recession-proof because they meet customers’ inelastic needs.
- Making a business more recession-proof requires advanced planning.
- Focus on revenue preservation, cash flow and investing in strategic demand generation.
- Technology helps analysis, measurement and monitoring that is crucial to success.
15 Strategies to Recession-Proof Your Business
When business owners and managers wear many hats and are crunched for time, the basic practices of good business hygiene often are the first to be put on the back burner, along with practices around advanced planning, cultivating long-term business strategies, and investing in growth. Yet during a recession, these practices have been known to make all the difference to a business’ success. To insulate your business against the next recession, choose the most appropriate from among these 27 strategies categorized into four buckets: good hygiene, preplanning, cultivation and investing.
Good Hygiene
1. Create a cash flow plan.
Running out of cash is always a top concern for business owners, but it becomes especially important during a recession. Start by getting a handle on your current cash balances and monthly sources and uses of cash. Create a rolling cash flow forecast for the next quarter to guide the management team and serve as an early warning tool that alerts them to variances.
2. Assess workforce needs.
Take stock of the number of employees and their skills to ensure they align with what your business may need during a recession. Be ready to make adjustments so that employees work efficiently and are organized in a way that maximizes their potential.
3. Operate within your budget.
This tip is the core of good business hygiene. It makes intuitive sense to operate within your budget, so that the business is in the best possible position should a recession hit. In fact, following a budget or operating plan is a best practice at all times. Some recessions, like the one associated with the onset of the COVID-19 pandemic, come without any economic early-warning signals.
4. Be patient.
Several studies indicate that medium-to-large family businesses have particular success weathering economic downturns. Their success is partially credited to multiple generations having the wisdom and experience to patiently ride out the ups and downs of many business cycles. The resulting levelheaded crisis management and long-term perspective supports their ability to be patient, as does the foundational support of lower debt levels and lack of external shareholder pressure. It’s important to remember, though, that patience and complacency are not the same. Patience has prerequisites; namely, following enough of the advice from this list to position your business to have the foundational supports that enable patience.
Preplanning
5. Know your liquidity options.
Investigate potential sources of capital before you’ll need to use them. Consider revolving loans, owner infusions, alternative financing, private equity and government resources, including loans backed by the Small Business Administration.
6. Establish flexible client agreements.
One way to help build customer loyalty is through negotiated flexibility, where one hand washes the other. Offer rewards in return for contracted sales volume, or customize offerings in exchange for faster payment terms. In addition to enhancing variables that help stabilize revenue streams, being flexible can create goodwill and repeat customers.
7. Create a business emergency fund.
Just as every financial planner tells individual savers to establish an emergency fund to cover personal expenses, a cash cushion is a wise business investment, too — especially for smaller companies that can’t easily tap debt markets the way a large enterprise might. Create an emergency cash fund that can cover up to six months of essential costs, including payroll, inventory and utilities. Aggressively collecting receivables can help get you started. Consider business continuity insurance as a different path to the same objective.
8. Pay down debt.
Coming into a recession as debt-free as possible positions a company to have the highest amount of capital available to draw on in the future, should you need it. Prepayment of debt may also save some interest expenses, which can be tucked away in cash reserves (see No. 10).
9. Find ways to cut back.
Cutting back operating expenses can be a challenging task, since maintaining a product’s level of quality is particularly important during a recession. Whatever you decide to cut should be invisible to customers. When looking for ways to cut back, it’s helpful to start with the biggest costs and see if there are small tweaks that can result in big expense reductions, such as taking advantage of early pay discounts from suppliers. Other examples include automating previously manual tasks and shifting the mix of labor between full-time workers and contractors.
10. Create an action plan before business slows down.
It’s a good practice to do scenario planning and develop action plans — which can be done well before a crisis hits. Creating thoughtful action plans can help minimize errors made under stress or bad decisions made in the moment. Soliciting employee ideas can prebake their buy-in should business leaders trigger the plan.
Cultivation
11. Create multiple revenue streams.
This strategy requires some out-of-the-box thinking about how a business can tap into new revenue streams using its current infrastructure. The concept involves capturing new money without making a major investment. For example, consider whether you can add business-to-business (B2B) customers if you typically sell directly to consumers, or vice versa. Extend your geographic footprint by selling online. Or repurpose your manufacturing process for a new product. For example, a bakery could start offering take-home kits for birthday parties.
12. Modify your offerings.
Identify ways to modify an offering to make it more attractive to customers during a downturn. Modifications can be made to the product itself, how it’s delivered, or how it’s priced, in order to cater to the way customer needs might change during an economic downturn. Examples include offering new product assortments or sizes, offering services virtually or pivoting from formal dress-wear to casual loungewear.
13. Niche down.
Take a page from the recession-proof industries, whose customers continue to purchase goods and services perceived as essential. Create a similar sentiment among customers even if your product or service is not as essential as, say, ambulance services. One way to achieve this is to niche down. Niching down means to cater so much to a specific need that your business becomes the essential go-to for it. Instead of an all-purpose bakery, become a gluten-free bakery. Instead of running a sporting goods store, become a soccer store. Instead of being a realtor, be a first-time homebuyer consultant. You get the idea. But you must choose wisely: Niching down requires truly mastering the niche. Otherwise customers will become dissatisfied and alienated. It’s not an easy strategy to execute, but if it’s done well, customers will be more likely to support your business, preserving your revenue.
Investing
14. Invest in adaptable technology.
The right technology can help keep a business running during challenging times while also saving money. It’s best to have technology installed and tested in advance to avoid costly or embarrassing errors during a crisis. For example, having the technology in place to change distribution methods, such as switching over to virtual delivery, allows service businesses to earn revenue when physical or in-person delivery isn’t an option, such as for tutoring, performances and publishing. Similarly, online ordering and contactless payment technology can help customers continue to buy products from restaurants and retailers. Such technologies can be a permanent addition, giving customers another way to interact with a business.
15. Don’t skip nurture campaigns.
Since a key focus of recession-proofing is preserving revenue, it’s important to continue marketing and promotion efforts. Loyalty campaigns geared toward recapturing past customers or increasing penetration with current customers can help keep the customer base healthy. Often, it’s more costly to find new customers than to stimulate current ones. Targeted promotions, especially those that align with customer pain points, can help increase market share if competitors go dark.
Conclusion
By the time business leaders know they’re in a recession, many may feel it’s too late to do anything more meaningful than slash costs. Recession-proofing a business must begin long before the economic downturn arrives. Recession-proofing is best approached in a thoughtful, measured way to avoid potential errors, which are more likely to occur when managers are ill-prepared for a crisis. It requires a balance of surgical cost cutting, smart customer marketing and strategic investment. Consider these 15 recession-proofing tips to help your company survive or even thrive during an economic slowdown.
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