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Managing in a Downturn: Lessons so Your Business can Fly
When the economy is in lockdown things get tough. But you can get through. Here is our guide to making your business fly during the hard times.
Managing in a downturn takes discipline and diligence.
A downturn in the economy is the slowing down of economic activities in a certain period. It occurs when the value of products, stock, and commodities fall. The gross domestic product grows slowly, stands still, or reduces drastically. A downturn makes productivity grow slowly or decline. The downturn in the economy is also known as the economic recession, which is caused by the loss of business and consumer confidence. When this business and consumer confidence is lost, it leads to a reduction of demand.
Causes of an economic downturn
- Loss of confidence in the economy. This leads to consumer refusal to buy hence causing panic. Manufacturers reduce the production rate, retail sales slowdown and the rate of unemployment increases.
- High interest rates. This reduces the money available to invest for example increasing the interest rates in order to protect the value of the dollar.
- Stock market crash. Loss of the confidence in investing can cause the sudden drop of prices of investing by at least 20% hence draining the capital out of businesses.
- Deflation. It reduces the value of goods and services being offered. This encourages people not to buy any goods or services until the prices are very low. This causes demand to fall and eventually leads to a downturn.
A downturn can really affect the economy negatively. However, there are ways in which one can curb the downturn thus reducing the effect of the economic downturn on his or her business. The following are some of the ways in which one can manage a downturn in the economy.
Assessing business performance
- When managing in a downturn, assessing business performance helps in identifying the areas in your operations that should be improved before they escalate into major problems. This can be done by:
- Reviewing your business plan
- SWOT analysis
- Financial analysis
- Using risk management to monitor the business performance
- In most cases, businesses exposed to the economic downturn will have changes that will affect their sales figures and revenue. This decline in revenue will cause fluctuation in profits and cash flow. An important part of managing in a downturn is keeping a close eye on your finances. Make sure you are:
- Monitoring your business and economic environment to understand how the changes that come with a downturn may affect you.
- Managing the cash flow.
- Managing your stock.
Pricing products and services correctly.
Strengthen your business
- This can be achieved by:
- Making clients a priority which entails providing clients with that which they want, when they want it.
- Reviewing your marketing strategies so that you can come up with new ideas to increase sales. It is important to explore free marketing tools such as social media during the economic downturn.
- Make sure you have an up to date human resource plan so as to detail your staffing costs hence can price products and services wisely.
- Networking with other business owners to understand how their businesses are coping. Also consider offering complimentary services and discounts in partnership with other businesses.
- Speak to financial advisors to help you survive the economic downturn.
An economic stimulus can help in managing and restoring the economy. This stimulus can be activated if the unemployed workers are employed through the public works projects or those who are unable to work should receive unemployment insurance so that they can have some money to spend in the meanwhile. This in turn will create jobs for other workers and ultimately ending the downward cycle.
Reduce debts and build up your capital reserve
When managing in a downturn your clients are more important than ever.
Watch the credit worthiness of your clients and even check up on them once in a while during the economic downturn to find out how they are faring. These will not only help you avoid unpleasant surprises but also build new opportunities in the future. Try to get long term contracts with your most valuable clients at anything approaching the acceptable terms.
Become margin driven
This is a business philosophy which directs to the setting of margin targets for each income category including the work that is self-performed. Margin targets mean that the percentage of revenue that is generated is usually retained after paying all costs of the production of that revenue.
Expand your marketing knowledge
Be able to differentiate your business from that of your competitors by providing information on the major benefits of your product or service that make it unique.
Identify ways to cut back
Identify which services or items that you do not need and those which are a necessity. This helps in reducing the money spent on discretionary items hence more can be saved or even used in the necessities area.
Live within your means
Most experts recommend that you only spend 30% of your net income therefore it is advisable to create a monthly budget to help you ensure that you are not spending way beyond your means. When managing in a downturn this is more important than ever.
Plan for the unexpected
Most often, a downturn usually gets back up before it turns into a recession. However, planning ahead is advisable so as to be prepared to face a recession period in the economy.
Careful tax planning
While still making sure that your organization is tax compliant, it is wise to improve your cash flow position by decreasing or deferring tax payments to the tax office. There should be maximum use of the losses in calculating the preliminary tax payments and to ensure all the available deductions are being accounted for.
Strategic merger and acquisition activity
Merger and acquisition opportunities present themselves in most industries during such a period. Having financial and operating flexibility are the keys to attaining these opportunities which tend to be more favourably priced than in a booming economy.
Communicate with the stakeholders
Managing the stakeholders in an organization is critical especially during tough times. The key to effective management is honesty and proper communication with the involved parties. It is crucial to keep the stakeholders aware of the opportunities and threats that a downturn brings to the business and the actions you would like to take from then on instead of springing up surprises which will unnerve then leading to their lack of trust in your abilities.
Take the challenge as an opportunity
During an economic downturn, several challenges present themselves. A natural response to the challenges would be to surrender and give up. However, it is important to view the new opportunities presented to challenge the old way of doing things and to also plan for the inevitable change that is about to occur in the market place. Effective managing ins a downturn will ensure your business comes out stronger and in a better position to be fit for the future upturn.
Effective management of key talent
The 2008 PwC Global survey showed that concerns over people and talent outweighs fear of recession. Engage with your people and be sure to motivate high performers. Watch out for pressure points but also be aware that the availability of rising talents for recruitment will be higher than during the economic boom years.
Understand the effect of the downturn on your business
- When assessing how the downturn will affect your business, it is important to ask yourself these questions:
- How will our customers behave – will they buy the cheapest product, buy the same product less often or buy a different version of the product.
- How will our competitors react – will they reduce their prices or join with other producers for cheaper costs and to reduce competition.
- What do we require to do in order to reduce the impact of the downturn on us – advance to the strength of our existing clientele instead of seeking to expand, focus on those clients who are likely to thrive in the difficult season, suspend the product or even go back and change the price tags in order to favour everyone.
Managing in a downturn in the economy, is a matter of discipline and diligence rather than pure ability. In addition, founders that adapt quickly get rewarded with new opportunities to prepare them for the inevitable upturn in the economy.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.