Storm Prep: Five Critical Tactics to Prepare your Organization for a Recession
If you’ve ever survived a nasty weather, or even the aftermath of an extended power outage, you may also know the pain of having been unprepared. A lack of preparation can mean everything from the mild discomfort of being unable to make coffee to enduring the loss of almost everything. Some thoughtful planning can make an enormous difference in what your experience might have otherwise become. Fortunately, same is true when your business when facing the potential storms of a recession.
Unfortunately, executives are often so busy with their day-to-day responsibilities they have little time for charting a path through these storms before the metaphorical dark clouds of the recession are upon them. So here are five critical tactics to contemplate as we enter 2023.
Perform a Break-Even-Analysis
In a recession, top line revenue growth can slow dramatically or even fall. That means it’s wise to contemplate how far revenues can fall at current margins and still produce positive cash flow. If you haven’t done so, now is the time. Be sure to pay attention to your fixed costs and search for tactics to lower them if possible. We work with our clients to anticipate the impact of thinning margins as well, producing best-case, worst-case, and most-likely-case scenarios to understand how these changes might affect compliance with banking covenants and their access to working capital. Once we’ve done so, we encourage our clients to discuss the results with their banking and other financial partners.
Evaluate Your Working Capital
Because recessions may impact your customer’s access to credit or their financial health, it’s a good idea to make sure your organization can endure an unexpected liquidity crunch. So, once you’ve completed your break-even analysis it’s wise to begin forecasting cash flow in 13-week increments. In such an analysis you will want to determine the impact of even a few days of slowdown in your accounts receivable collection period, as well as the possible impact of carrying raw materials & other inventory. If you haven’t done so, now may be the time to reduce your carrying costs, just as you’ve done with fixed costs.
Know Your Key Customers
Ensuring you know your key customers is, of course, essential to your organization’s success. If you haven’t already done so, make sure you and your sales team are keenly abreast of their possible needs during a recession. Too many leaders lose touch with customers—especially after periods of rapid growth—so now is the time to reconnect. Make sure you have an effective CRM system in place to know which key customers you’ve been staying in touch with than during stable economic periods, so you may want to examine your sales incentives to ensure you are rewarding your sales executives for
becoming trusted-advisors and retaining those key customers.
Retain Your Key Employees
Hiring has been a notable challenge for most organizations in these post-pandemic times. Wages have been driven up as the participation rate in those seeking work has fallen. Just as losing a key customer is more painful during a recession, so too is losing a key employee. Before the storm hits, we encourage you to engage in a through and deliberate talent assessment and planning process like our NorthStar© approach takes. The information you’ll harvest through such a process will allow you to make better decisions about personnel and how to reward and retain them rather than resort to a strictly cost based process of layoffs and reorganization.
Examine Your Supply Chain
Disruptions to your supply chain can have the same sort of devastating impact as an unexpected liquidity crisis. As such, you will want to keep abreast of trends affecting your industry at the macro level, as well as at the micro level. Now is the time to make sure you and your purchasing officials are talking to your key vendors about what they have done to prepare for the recession and how they believe it will affect their ability to provide you with the goods and services you need to run your business. You will also want to talk to your transportation services providers if you’re a wholesaler, manufacturer, or retailer. And you and your financial team will want to re-assess the credit worthiness of anyone in your supply chain today. You will be glad you’ve tightened up your credit before you begin seeing weaknesses manifested by a slow-down in your collections or, at worst, an increase in bad debt.
Like many things in life, these five things are simple. They just aren’t easy. Finding the time to work through them or knowing how to execute them efficiently can be a challenge. But we’ve found they are critical components of our client’s strategic and tactical planning. And if you’d like some perspective about these topics, or perhaps some help executing them, email [email protected]. You can also learn more about us at www.psghsv.com.