Business Resilience: Five Tips To Help Prepare Your Company Prepare for a Recession
Image by cottonbro studio on Pexels
The pandemic has put many businesses across various sectors into the gutter. It came as a surprise and hampered their growth potential amid supply chain disruptions and low consumption levels. Emerging and developed economies plunged into a deep recession for two consecutive quarters.
Nonetheless, this unprecedented event opened more opportunities and led to a sustained rebound. So, in 2021, the global economy has enjoyed a drastic increase in business activities.
However, this was cut short as inflationary headwinds took over. The Russo-Ukrainian War and border closure of China in 2022 aggravated it. Interest rates, in turn, rose dramatically to combat inflation, dampening global economic performance. With sporadic global capital inflows and softer demand, recession woes are resurging today. This leaves entrepreneurs hanging, prompting them to protect their business as early as now.
Even more challenging is the instability in global oil prices amid the changing demand, potential OPEC+ oil cuts, and the current tension in the Middle East. Economies must brace themselves for more volatile oil prices and hawkish policy stance as inflationary headwinds persist. Entrepreneurs must watch out for a potential consumption slowdown after the holiday season.
In this article, we will look at some tips to help your business stay afloat in a stormy market landscape.
An Overview of the Current Global Economic Condition
The global economic rebound and the boom have already peaked in 2022. And with all the things that have transpired in the past year, the narrowing growth may continue. The geopolitical tension in Europe resulted in high energy commodity prices.
Brent crude oil prices breached $100 per barrel for the first time since the Great Recession. Likewise, WTI oil prices set a new all-time high in nearly 14 years at $114 per barrel. These put upward pressure on prices, leading to sustained inflation. In the US, for instance, inflation reached 9.1%, the highest in 40 years. This prompted the US Fed to implement drastic policy rate hikes. Their combined impact led to slower economic growth and raised recession fears.
In addition, the hard lockdown in China affected the performance of export-driven economies. Goods and services movement was hit the hardest, leading to lower demand and production capacity. It puts more pressure on prices, especially those highly dependent on its raw materials. Even tourism was not spared, as it comprised 12% of the global tourism spending. The global debt market also reflected its unfavorable impact.
Now, the global economy is more stable than in 2022. Inflation has decelerated, while policy rate hikes are still on pause. However, prices and interest rates stay elevated. Oil prices are again regaining momentum, given the Brent and WTI price uptrend for two straight months.
The conflict between Israel and Palestine also raises concerns about the oil supply from the Middle East. Given this, inflation may rebound in 4Q, supported by potential spending splurge in the holiday season and higher demand for energy commodities during Winter.
Moreover, central banks across the globe are hinting at their hawkish policy stance, leading to another rate hike in the next quarter. While these may help combat inflation, GDP growth may drop. The International Monetary Fund (IMF) lowered its FY23 and FY24 Global GDP growth outlook to 3.0% and 2.9% from 3.5% in 2022.
Image by Campaign Creators on Unsplash
How To Prepare Your Business for a Recession
Recession woes remain unpacified despite the reassurance of policymakers across the globe. Many analysts believe that leaders are either in denial or avoiding questions from critics. Amid all these trends, businesses across different sectors must be aware of its potential impact. Given their limited resources, small and medium enterprises (SMEs) are most vulnerable to inflation. Most importantly, they account for 90% of businesses and 50% of employment globally.
But regardless of business size, previous events have shown that even massive businesses are at risk of bankruptcy. Take the Silicon Valley Bank collapse as an example. Likewise, the Evergrande Group, China’s second-largest real estate developer, filed for bankruptcy in August, leading to uncertainties in the global debt market.
Given all these, entrepreneurs must watch out for all macroeconomic changes and protect their businesses at all costs. These are some tips to improve your business resilience.
1. Go along with digital transformation
The pandemic has paved the way for the acceleration and peak of digital transformation. And now, most businesses are using technology to maximize their efficiency. This transformation can help produce more while keeping costs and expenses manageable amid inflation.
Workflow automation
One of the best ways to utilize technology is through software and solutions to optimize workflows. Investing in the right tools allows you to track transactions and streamline business processes. That way, businesses can enhance productivity and cater to more consumers.
Even better, it decreases task repetition, which is the primary cause of employee burnout. This is a crucial business aspect as the remnants of the Great Resignation remain evident. Through these solutions, you can lessen employee turnover and avoid incurring costs of hiring new ones.
Human capital management (HCM) solutions are excellent examples, given the prevalence of hybrid work. These allow you to communicate with your employees even if they work away from the office. These also help improve payroll management to avoid errors, employee complaints, and taxation problems.
Cashless payments
Second, entrepreneurs can digitize their payment methods. Cashless payments are more common today. They have already exceeded cash transactions as households and businesses become more geared toward mobile wallets, credit cards, and bank transfers.
From 2016 to 2022, the share of cash payments dropped from 31% to 18%. Meanwhile, debit and credit card transactions rose from 27% to 29% and 18% to 31%, respectively. This practice is more common for businesses with fewer or no physical stores. By adopting cashless payment methods, companies may increase their demand and transactions.
Even better, digitizing payments will make tracking all business’s financial obligations and purchases easier and cheaper. Imagine an accountant coming to the office and seeing piles of invoices on his table. It will take much time and effort to sort them individually and ensure financial data accuracy. With mobile wallets and credit cards, it will be easier to check transaction history. Also, employees can use credit cards while traveling on business, so it will be easier to track their expenses.
Online presence
Lastly, businesses can increase their presence on the internet by creating business websites and pages on social media websites. Online marketing is more straightforward than going back to traditional flyers, newspaper advertisements, and even television commercials.
You could see increased customer engagement since your website will make it easier for customers to find you. Also, business transactions may be faster, although you must still be mindful of the risks of fraudulent transactions.
2. Assess KPIs and stay away from debt
With the softening demand and slowing economic growth, entrepreneurs must balance their ability to generate sales while improving efficiency. Affordability can be a crucial factor in driving demand.
However, it may not cover the cost of managing the business. Even so, you can check the performance of each product and service by comparing sales to costs and expenses. That way, business owners can focus on what they do best and limit or forgo those costing them a lot. The EBITDA margin is an excellent way to assess profitability. It accounts for all operating costs and expenses, excluding depreciation and amortization.
Looking into the balance sheet is a better option since it tells the capacity of the business to sustain itself. Cash, borrowings, inventory, and receivables are typical accounts to check.
For inventory, businesses must check how long it takes to sell their products. They can see how long receivables take before customers and borrowers pay them. Considering bad loans amid higher prices and interest rates is also important. Lastly, for cash and borrowings, they can tell how much they need to remain solvent without disposing of assets. Some metrics are the Quick Ratio and the Net Debt/EBITDA Ratio.
Lastly, the cash flow statement shows the actual movement of cash in the business. It is timelier than the income statement since it only accounts for actual cash transactions. Depreciation, amortization, impairment, and valuation gains/losses do not lead to cash outflows or inflows.
Additionally, it incorporates both the income statement and the balance sheet. Some accounts to check are the net working capital, CapEx, especially for capital-intensive companies, and Free Cash Flow (FCF). The FCF/Sales ratio is the most helpful metric since it shows how much free cash it generates from sales.
But most importantly, avoid borrowing as much as possible. Understandably, many startups opt to borrow to finance their expansion. Some, especially the elders, establish their businesses at home, so they apply for VA home loan.
Beware of macroeconomic risks. Also, watch out for receivables, especially those with high turnovers. Interest rates are skyrocketing despite the pause since February. During the most recent board meeting, the Fed hinted at its plan to hike interest rates in 4Q23. This makes borrowing costs even more expensive.
3. Ensure employee satisfaction
Capital and labor are the lifeblood of a business. Even if a firm invests in the most advanced technologies, these will be nonsense without labor. AIs are emerging in several industries, like customer service. However, those requiring technical skills and hard labor are indispensable. So to avoid wasting much money and time on hiring and training new ones, keep employees satisfied.
Aside from salary raises and bonuses, there are many other ways to do this if the business is short of cash. Creating a vibrant yet relaxing workplace is vital. Setting a specific space for employees to take a short break or talk with their colleagues can help. Soft-skills training will also help so employees will not feel stagnant. Implementing hybrid work can also help lessen or avoid burnout. Lastly, being more open to their questions and suggestions through open-door meetings will make them feel valued.
4. Reach out to customers
High customer engagement is one of the secrets to business success. By reaching out to them, customers feel valued and involved. Their opinions really matter since these are most likely bias-free.
One effective way is by doing surveys. But a more comprehensive way is by doing Quarterly Business Reviews (QBRs). For smaller businesses, doing these surveys every month is possible. It is an excellent approach to tracking business performance and setting goals with the help of customers. That way, businesses may identify the specific areas to focus on or improve to maintain or drive more demand.
5. Watch out for macroeconomic changes
Another crucial step is to watch out for macroeconomic changes. This will help business owners determine the direction of the industry. Higher prices and interest rates mean limited consumption and higher business risks.
Some industries, like hotels and timeshares, are less sensitive, given the extraordinarily high demand for travel. But overall, macroeconomic changes directly influence consumer behavior and production capacity. So, getting timely updates helps entrepreneurs make well-thought-out decisions to improve and protect businesses.
Get More Lucrative Business Information from Trusted Sources
Managing businesses is more challenging today amid macroeconomic volatility. Risks are high as price levels and interest rates soar. However, entrepreneurs can do many things to prepare their businesses for a recession. For more industry and macroeconomic updates, visit Rebellion Research regularly. We publish timely research and analyses from reliable sources globally.
