How to Recession-Proof Your Business

Nobody likes an economic downturn, but being prepared can soften the blow. The first step is knowing how to read the signs – not necessarily for the economy as a whole, but for your business specifically. Then you need a strategy for managing your production and distribution, and workforce planning will be particularly important.

Fortunately, today’s leaders have more options than ever to manage risk in uncertain times. This is how you can prepare yourself, your company and your team.

See also: How to prepare your business for the economic downturn

How will we know when a recession has started?

The term “recession” does not have a clear definition. In the broadest sense, this means a retreat of the economy. Government agencies and many private organizations rely on the National Bureau of Economic Research (NBER), a nonprofit research institute, to flag recessions for official statistics. The NBER generally defines recessions as deep, prolonged, and widespread declines in economic activity, but makes exceptions for brief and particularly severe downturns, such as those seen at the beginning of the pandemic.

The main feature of a recession is a drop in demand for goods and services. Households, businesses and governments just don’t buy that much stuff. As a result, companies may find that they need to cut costs in order to break even. They may also have to reduce their production capacity, which may mean closing facilities, ordering less inputs and cutting labor costs.

In the overall economy, these effects add up to lower incomes for households and lower profits for companies. So the sooner you can see a recession coming, the better. But the NBER only dates recessions months after they start and sometimes months after they end. Furthermore, the label “recession” does not change the economic situation.

It’s important for owners and managers to decide what a recession means for you – what is a deep and sustained decline in your business, how can you prepare for it, how will your strategy change to its end, and how will you seize opportunities afterward? it ends?

See also: For savvy entrepreneurs, an economic downturn creates opportunity

What does a recession look like for your company?

The first signs of a recession for your business will likely be lower orders. A recession is almost always preceded by a period of uncertainty, making your customers reluctant to buy more goods and services than they need. They will be less willing to sign long-term contracts and more likely to cancel existing orders.

On the other hand, it might be easier to store inputs. Your suppliers will also see less demand, so they may be able to fill your orders faster at first, and possibly even at lower prices. As soon as they reduce their own production capacity, this situation will resolve. So there might be an opportunity to build up supplies for the future at a lower cost as long as they are non-perishable.

Workers will also react to the uncertainty. They are less likely to leave their job as new jobs will be harder to find. Some may even try to work at a higher level so they are more likely to keep their jobs during layoffs. They may also accept smaller or more infrequent increases in salary for the same reason.

Perhaps paradoxically, the period just before a recession is possibly the most profitable and productive of the entire business cycle — but don’t be fooled. You don’t want to end up with too many inputs or large inventories of your own products when demand in your industry falls. Until the uncertainty dissipates, you should pay close attention to the signs and react with caution.

See also: “We will have a Whopper recession in 2023”: State of the US economy remains uncertain

How to prepare for a recession

Traditionally, the most effective tools for dealing with economic uncertainty are embedded in supply chains. Since the 1970s, just-in-time manufacturing has relied on supply chains that anticipate input needs and ensure that inventories match demand on a daily basis. But these supply chains bring the raw materials, intermediates, parts and energy that companies need to produce; they don’t supply workers.

That is why human resource planning is so important. When companies face weaker demand, they can furlough workers or lay them off altogether. When the economy recovers and demands returns, companies have to hope that they can fill the same positions. They have to go through costly and time-consuming hiring processes, especially when the job market gets tight.

Meanwhile, the workers still employed have to make up for the slack. In government statistics, labor productivity typically increases after recessions, when a smaller workforce is called upon to produce more goods and services. In practice, the added pressure on workers can create tensions with employers and is likely to add to the wave of unionization already sweeping through the economy. Overworked employees can easily resign as new job opportunities arise.

Some companies try to avoid this whiplash in the job market by retaining their employees even when demand for their products wanes. Right now, American companies have near-record cash levels, and retaining their employees could help build long-term loyalty. But public company executives who hold on to their employees could end up coming under pressure from investors expecting extremely disciplined spending, especially during a recession.

Another strategy is to force employees to work part-time. The number of workers working part-time for economic reasons – not voluntarily – tends to skyrocket during recessions. But again, these workers may leave their jobs if a full-time position becomes available elsewhere. At a time of high gas prices, employees too may choose to leave their jobs rather than commute the same distance for half the wages.

Related: Yes, it’s possible to prepare your business for a recession. Here’s how.

The advantage of flexible working

In contrast, companies using flexible working are in a more advantageous position. These companies are populating their workforces with online apps like Upwork, Toptal, and Instawork, adapting in real-time to changing employee needs. They typically have a core of permanent employees, and then hire additional employees for specific tasks, shifts, or longer assignments without worrying about promoting excess labor or future layoffs. In their apps, they can also keep rosters of workers who have already received all the necessary training and are the best fit for their jobs.

These apps are part of a transformation in the economy that is finally helping workers keep up with the other just-in-time inputs of the production process. For example, most shifts for warehouse work in the Instawork app are filled within just 12 hours. Shifts in the service sector are slightly longer, but still less than 24 hours on average. In the evening, supervisors can decide how many workers they need for the next day, and qualified people come in the morning. There is no need to call an agency or vets well in advance.

Flexible work also offers employers the opportunity to “test before you buy” by testing relationships with a large number of workers before committing to permanent employment. When the economy starts to recover, these employers will be well positioned to add to their payrolls. In fact, during the hot job market in the first half of this year, companies eagerly hired professionals they found on Instawork.

See also: 5 Ways to Sustain Business Growth During a Recession

seize opportunities

Recessions are moments of brain drain and change in the economy. For companies that are well prepared, the possibilities are numerous. Taking advantage means keeping cash on the sidelines during booms and thinking beyond the end of the recession well into the next business cycle:

• Attitude. Companies tend to lay off their part-time and least-essential employees first. But when a company collapses, key full-time employees also lose their jobs. You may be able to bring in talent that wasn’t previously available, maybe even at lower wages. Employees who still have a job may also be available for less pay. However, you must have saved enough money to increase your staff count.
• inputs. Troubled suppliers will be greedy for business, and most importantly, the long-term contracts that will keep their business alive. If you have enough confidence in the sustainability of your own business to get involved, you may be able to secure low prices that will look even better in the next boom.
• market share. When companies collapse, their market share goes to their competitors. In industries with loyal customers, this can be a rare opportunity for companies that respond quickly and decisively with marketing and reach. In industries where customers are more price-driven, you may be able to increase your market share by undercutting your competitors, even if they all stay in business. They will then have less cash on hand, making it harder for them to adjust their prices. And customers whose budgets are also under pressure are sure to appreciate your discounts.
• acquisitions. Most companies would rather be bought out than shut down altogether. Recessions are usually the best time to buy complementary companies or your own competitors. Finding bargains can pay off when the economy recovers.

Maintaining the discipline to set aside money for opportunities like this can be difficult, especially when recessions seem so infrequent. Investors typically expect profits to be reinvested or distributed as dividends. But recessions still happen, and when they do, a little forethought and preparation can go a long way.