The Next Recession Is Coming – Are You Prepared?

The “Great Recession” began in December of 2007 and officially ended in late 2009. There were few businesses that were not hard hit or left unscathed from the financial meltdown that destroyed thousands of small businesses and brought a number of Fortune 500 companies to the brink of insolvency.

Thirteen years later, most of us have forgotten about the pain and suffering that afflicted so many American households as their financial safety nets evaporated in a world where credit became almost non-existent.

The unemployment rate is at a 17-year low, applications for unemployment insurance payments have dropped for several years in a row. Corporate profits are at all-time high and the stock market has quadrupled since 2009. This scenario reminds me of Michael Crichton’s movie, Westworld, “Where nothing could go wrong, go wrong, go wrong, go wrong”!!??

The question for small and medium sized businesses {$5.0 to $50.0MM} is, “Are you fully prepared for the next recession”?

Here are the critical items a business can put into place now in preparation for the next recession:

DEFINE THE VALUE PROPOSITION: What does the business stand for? Identify what the company is the “Best in the World At”. Clearly define why the company exists along with its competitive advantage in the market.

ITS ABOUT THE PEOPLE

Management Team and Systems Add Value: The CEO or owner is the “Orchestra Leader” and no longer plays an instrument; the management team is considered self- sufficient and has clear roles and responsibilities.

Create Effective Performance Management: Build an effective business model that links employee performance with the operating and financial plans.

FINANCIAL MANAGEMENT

Drive “Good” Sales: Enter niche markets, patent new products to create barriers to entry. Develop the gross margin matrix by customer; high volume/low margin, low volume/low gross margin, low volume/high gross margin and high volume/high gross margin.

Lower Cost of Goods Sold: Develop scale economies, acquire captive access to raw materials, increase efficiencies in processes {production, distribution, services and labor utilization}, implement cutting edge cost control systems. Put inventory management processes in place; measure turnover of inventory for efficiency and cash management.

Control Operating Expenses: Budget and monitor expenses, identify fixed versus variable expenses, manage expenses at lowest level possible, keep track of recast items.

Create Effective Planning: Build cash reserves that are at a minimum six times monthly operating expenses {operating expense is $50,000 X six months equals $300,000 in cash reserves}.

OPERATIONAL MANAGEMENT

Increase Economic Value/Decrease Capital Base: Invest in only positive high growth projects. Withdraw or liquidate underperforming businesses, implement product line profitability capabilities to determine winners and losers. Utilize information technology to drive decision making; institute business measures and key performance indicators that lead to outcomes {results}.

Reduce Business Risk: Perform at a higher operating level compared to competitors, long–term contracts, etc. Institute financial transparency, including the retention of audited financial statements.

Reduce Cost of Capital: Maximize use of debt to support equity, possibly use less costly equity substitutes, such as mezzanine debt, reduce surprises {volatility of earnings}, consistently test the market cost of debt, walk down the private capital access line whenever possible.    

Reduce Customer Concentration: No single customer should account for more than 20% of sales.

If You Can’t Measure It, You Can’t Improve It. Management thinker Peter Drucker is often quoted as saying that “you can’t manage what you can’t measure.” Drucker means that you can’t know whether or not you are successful unless success is defined and tracked.

Remember, you cannot predict when a recession will occur, yet you can successfully prepare for it before it arrives.