For years, economists have predicted a recession. According to an August 2019 survey by the National Association for Business Economics (NABE), 98% of NABE members surveyed believed the U.S. economy was headed for recession.
38% of them even predicted 2020 as the year downturn would strike. However, none of them predicted the cause.
2020 has surprised us with a different kind of recession than we’ve ever seen before. It has affected every global market and is increasingly hard to predict. Adapting to this new “normal” is crucial and for many businesses severe changes are necessary.
History of U.S. recessions
Recessions are part of the economic life-cycle and are generally identified by a fall in GDP in two successive quarters. Although they typically last less than a year and a half, the repercussions of a downturn can linger much longer.
History tells us we’ve had around 50 recessions in our economy since the United States was founded, most notably the Great Depression and the Subprime Mortgage Crisis. During the Great Depression unemployment went as high as 14% and the Subprime Mortgage Crisis dropped the Dow 777.68 points in one day.
What most of our recessions have in common is a surplus of goods, inflated evaluations, and mistakes made by the Federal Reserve on rates. These kinds of recessions also signal a rise in unemployment numbers and a drop in the stock market.
Recessions have a vicious life cycle affecting both businesses and individuals, which can send the economy into a frenzy. From around 1985, 88% of job losses during recessions were “routine” jobs, like retail workers, manufacturers, and hairdressers. In other words, “non-essential” workers can often take recessions the hardest.
How today’s data compares
Fast forward to today and you’ll see unemployment rates went from 3.5% to 4.4% from February 2020 to March 2020 across the U.S.—making this the largest over-the-month increase in rate since January 1975. In the week ending in April 4th, weekly unemployment claims were over 6.6 million—for a total of over 17 million unemployment claims in the preceding 30 days.
In just 1 day the Dow dropped 2,013.76 points (almost a 10% drop). The U.S. currently has the highest confirmed cases of COVID-19—almost 22,000 deaths as of April 13th—with a global number soaring over a million. The data is sobering.
With global trade markets so heavily dependent on one another, no country is “safe” from these tough times. A recession in any country that plays a big enough role in the economy can start a worldwide downturn.
How can we prepare for a recession?
Although some businesses are more susceptible than others, all will be affected by the COVID-19 recession.
What makes any recession so terrifying is the fact that many companies float cash and have a high level of debt. Cash coming in doesn’t always equal cash going out. Generally, in a deep recession, governments step in to give some relief to curb the negative side-effects of an economic downturn—but that’s not guaranteed and almost never happens immediately.
In today’s case, the U.S. government introduced a $2 trillion dollar stimulus package known as the CARES Act. The CARES Act includes individual relief in the form of one-time checks sent to working adults making less than $76,000 AGI as well as new and expanded loan programs offered to small businesses through the SBA.
In order to help slow the lasting effects of a recession you’ll need to rethink your business decisions. Although you can’t completely recession-proof your company, we’ve compiled some key strategies that will give you an advantage in being prepared for the downturn we’re currently facing.
Know the trends
It’s a good idea to stay updated on global trends and understand the baseline for your company’s business sector. What makes similar companies successful? What do logistics look like? How do you make a profit? These are all important things to know about your industry when you’re building a successful game plan.
Be aware of any dramatic changes in your industry as this will help you decide when tough times are coming and what you’ll need to address to stay in business.
Create clear budgets and minimize your risk
Downturns happen rather quickly and the recession we’re starting to see from COVID-19 is no exception. You’ll want to refer back to your budget when deciding how to “trim the fat” during these difficult times.
Create a clear budget at the end of your fiscal year so you can easily decide what’s important to fund next year. And in cases of emergency, don’t be afraid to do a budget overhaul mid-year if necessary. Be strategic and pragmatic. Right now is a good time to cut back or eliminate travel expenses, and try to mitigate the risk your company is currently carrying.
Create a cash reserve
This sounds too easy—but having 6 months of cash flow to keep your business afloat may be what keeps your company alive during this downturn. Although this might not be something you can easily start in the current recession, any savings can help extend your runway.
During good times, take a little less profit to build up your reserve. While it’s tempting to keep spending to lower your tax burden, and to reinvest in growth, a little more taxes and a little slower growth can help when the rainy day comes. The key here is to keep this money for emergencies only and add funds on a recurring basis. Keep your cash coming in and limit cash going out.
Become flexible with your business model and adapt
To be more flexible you need to understand where your company makes the most cash (development, marketing, engineering) and which areas are most affected by the economic downturn (revenue generating teams).
If you’re a small business you’ll need to know how to adapt to stay in business. Currently many companies are adapting by introducing new processes into their day-to-day operations: from restaurants adopting curbside and delivery services to office supply companies offering free services to help small businesses stay open.
Don’t put all your eggs in one basket
Certain companies are more susceptible to the impacts of a recession, however a downward trend in one business sector could lead to a domino effect in others. Even though we are seeing success with stay-at-home orders flattening the curve, a side-effect has been the shuttering of many small businesses.
Make sure you aren’t investing everything you’ve got into one distribution channel. While local businesses are suffering now, many e-commerce companies have seen a boost in sales. Diversifying will also allow you to lean on other areas of the business that aren’t being as impacted by the recession.
Consider alternative funding options
In times of emergency, you should be prepared to take advantage of alternate funding options. Financial institutions and banks will often present more flexible loan options with faster approvals and deferred payments. You can also take advantage of small business grants or disaster loans provided by the SBA.
Bringing it all together
As we now enter a recession for the first time in over a decade, it’s time to bolster our defenses and make sure we’re prepared. It’s important that you understand your business, build cash reserves, and create a diverse portfolio of goods, services, customers, and distribution channels.
Doing these things and focusing on what you can change will allow you some breathing room and give you time to adapt in the current climate.