Preparing Your Business for an Economic Downturn

Understanding recessions, stagflation, and how your business can prepare for the times ahead.

We’ve barely caught our collective breath from the pandemic-induced business disruption of the last two-plus years and talk of a recession lingers. Indicators like interest rates and inflation point toward the certainty of yet another challenging financial period.

A downturn of some kind seems inevitable. Media, economists, and financial professionals are vacillating between whether we are embarking on a recession or experiencing “stagflation.”

In this article, the first of two-part series, we explore recessions and stagflation and what they mean for businesses. In the second, we advise on “How to prepare your business for a recession,” providing strategies and insights for ensuring your organization is equipped to operate through economic volatility.

PREPARING A BUSINESS FOR A RECESSION VS. STAGFLATION

A recession is defined by the National Bureau of Economic Research (NBER) as "a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Considered one of the most influential domestic economic policy think tanks, the NBER is well known for providing start and end dates for recessions in and for the U.S. According to economists, U.S. recessions historically last 2-18 months, with the average being approximately ten months.

When the economy takes a downturn, small and medium businesses (SMBs) tend to be most affected. Two-thirds of businesses see a decline in revenue and profits during a recession. Recessions are a normal part of our economic and business cycles, so it's important to be prepared. Recession-proof companies not only survive when the economy declines, they tend to thrive. While it’s not really possible to recession-proof your business entirely, there are measures you can take to ensure minimal impact.

Coined in the 1970s, stagflation, a combination of the words stagnation and inflation, is a term used to describe simultaneous high inflation and high unemployment. While not as common a term as “recession,” current economic indicators point toward stagnation. But if employment rates remain consistently high, the likelihood of a recession seems more probable.

Regardless, economists agree that we should continue to prepare for an economic slowdown of some kind this year and that it will most likely take place sooner rather than later.

READINESS FOR UNCERTAINTY IN YOUR BUSINESS

Some organizations thrive during a recession but most tend to get squeezed. “Recession proofing” strengthens those affected organizations by helping them to withstand the impact of a downturn in the economy, regardless of how severe. Preparedness is the smartest way to create and position a resilient business in times of economic uncertainty

MAXIS® by Freed Maxick is an invaluable service that provides actionable, measurable insights to drive productivity, performance, and profitability. It accelerates strategic and sustainable growth. A MAXIS partnership prepares businesses for a recession by enabling small and medium-size businesses to emerge stronger, better organized, and more capable of operating during challenging economic periods.

Two action items should take precedent to better understand how prepared for a recession your business actually is:

• We recommend taking immediate stock of your business to alleviate the surprise factor that a recession can bring. First, complete an “internal audit” of your technology, tools, processes, procedures, people, and finances. Seek to identify the areas that are strong and those that would (will) require additional attention during a poor economy. Make this ‘audit’ repeatable for future assessments regardless of the economy. When things become stable, review the audit in a pseudo-event post-mortem. Identify what worked well, what didn’t, what and how you would improve, and any remaining lessons that were learned from the experience.

• Second, run through “scenario” planning by creating “what if” situations where you create a protocol to plan responses and attain desired outcomes. For example, “What if a supplier goes out of business?” “What if there is an opportunity to acquire a competitor and we require immediate capital?” “What if I take that risk and the economy takes longer to improve?” “What if I lose my biggest customer?” Make sure you have actionable responses with intended outcomes should you encounter them.

Surging inflation, rising interest rates, and soaring costs dictate the need for preparing your business for higher performance and financial stability in a recession. A healthy financial position will make your organization much more resilient to recessions, stagflations, and any other challenging economic and/or business period.

Is Your Business Prepared for a Recession?

Well-prepared organizations will make it through times of uncertainty. Is yours one of them? Contact Alexis Becker for a complimentary consultation at 716-332-2619 or alexis.becker@freedmaxick.com.