30 August 2023

Weathering Recessions: Insights and Strategies for Businesses

Every recession has its unique aspects. Steady leadership and meticulous planning can navigate the storm. Let's delve into the practical measures businesses can adopt to minimise the impact.

One common marker of a recession is two consecutive quarters of economic contraction. These downturns arise from imbalances within the market, triggered by internal or external factors. The triggers vary. Previously, recessions were linked to external factors such as wars or natural disasters, but the shift in economic theories brought about a change in perspective. These theories introduced the concept of business cycles, characterised by alternating peaks of expansion and troughs of contraction. In modern times, we recognise that market imbalances triggers recessions. Although the exact timing and extent of value loss remain unpredictable, the inevitability of recessions underscores their impact on economies.

Can we predict recessions? Forecasting them is a precarious task. Recessions arise from a combination of factors including geopolitics, economic cycles, and financial sector involvement. Geographically isolated recessions tend to spread, and today's business climate is marked by elevated volatility. Businesses can fall into one of four categories based on their resilience.

1. Thriving Companies: These entities enjoy steady demand for high-margin products, easy talent attraction, and streamlined supply chains. With strong financial foundations, low leverage, and ample cash reserves, they are in a fortunate position.

2. Susceptible Businesses: Companies in this group face complex supply chains, competition-driven market shares, and thinner margins due to inflation. Adapting and reforming are key strategies for them.

3. Survival Strugglers: Businesses burdened with debt, low cash reserves, and exposure to geopolitical disturbances belong here. They face the challenge of enduring the storm.

4. Growth-Centric Ventures: This category includes newer companies prioritising expansion over profitability. During recessions, they must transition to profit-oriented models as funding tightens.

Systemic resilience is paramount for all companies. Defensive and offensive strategies can fortify businesses. Defensive measures entail cost reduction, price adjustments, cash preservation, and shoring up supply chains. On the offensive side, mergers, new business ventures, talent attraction, and retention strategies prove invaluable.

Recessions or downturns resemble inevitable weather patterns—a question of when they arrive, not if. Just as a well-built structure stands strong against storms, a resilient business thrives even in economic downturns. Resilient business possesses the strength to tackle unforeseen obstacles. Scenario planning, risk management strategies, enhanced agility, and solid environmental, social, and governance (ESG) metrics contribute to effective preparation.

Resilient businesses not only weathered the storm but excelled. The differentiating factor? Focus on margins—the gap between selling price and production cost. Resilient companies proactively streamlined operations to enhance margins during the recession. They also shed underperforming segments, reallocating resources to align with the new economic landscape.

Investment during a recession is daunting, but history attests to its potential. Businesses investing strategically in areas of known demand exhibit resilience. Moreover, seizing opportunities that arise from competitors' missteps strengthens a business's position.

Recessions are inevitable but not impassable. By understanding their nature, adopting proactive measures, and capitalising on change, businesses can endure and emerge stronger.

If any of this makes you think, that’s me and what should I do. Give us a call we have a number of ways to assist depending on what category you are in and what your business needs. Just our Summit Club or Summit Circle communities as we look towards the uncertainty of the future or we can have one on one discussions with you to help understand your needs.




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