Surviving a Recession

The truth may be that we are in for a longer ride than we optimistically expect.

For example, economists generally agree that we were in a bear market cycle from 1966 to 1982 – a period lasting 16 years – and that we experienced a bull market from 1983 to 2000 – a period of 17 years. If history is our guide, the recovery might not come quickly.

Fixing the global mess will probably take years. So, as small business owners and entrepreneurs, what do we do, and how do we survive? 

For what it’s worth, here’s our two cents on survival in a recession.

What Is a Recession?

A recession is defined as a significant decline in economic activity that lasts for an extended period, typically visible in GDP, income, employment, industrial production, and wholesale retail sales. Recessions are officially declared by the National Bureau of Economic Research (NBER) when they identify a peak of economic activity followed by a period of decline.

Possible Causes of a Recession

• Economic Shocks: Sudden natural disasters, geopolitical tensions, or pandemics can disrupt economic activity.
• High Inflation: Excessive inflation is inevitable; it erodes purchasing power and can result in reduced consumer spending.
• High Interest Rates: Central banks may raise interest rates to combat inflation, but higher borrowing costs can slow down investment and spending, leading to a recession.
• Reduced Consumer Confidence: When consumers fear economic instability, they tend to cut back on spending, which, in turn, reduces the demand for goods and services.
• Financial Crises: Banking crises, such as the one in 2008, can lead to a collapse in credit availability, severely hampering economic activity.

Ways to Survive a Recession

1. Shift your paradigm away from growth and toward survival

Survival in a recession requires a paradigm shift. This is a dramatic change that runs counter to how entrepreneurs are deeply programmed. But, again, we are experiencing an economy we have not seen before. This means changing your assumptions about growth, revenues, and earnings. Any baseline assumptions or business plan projections that were based on the old economy are impractical, if not meaningless, now. For many businesses, the only thing that really matters is surviving this cycle to live and take advantage of the next one.

2. Control your spending and preserve your capital

It is absolutely critical to reduce costs. Manage the pennies, and the dollars will take care of themselves. Consider dropping marginal product or service lines. If you can reduce costs and still focus on critical priorities that differentiate your company from your competitors, that is wonderful. However, some companies will be forced to choose between maintaining spending on those differentiators and company survival. Spend every dollar as if it were your last.

3. Reduce your debt to lower your risk

This isn’t easy to do, especially when revenues slip. But companies that fail to do this effectively will be far less likely to survive this recession. The only way to accomplish this is to spend less than you earn. In other words, if your company is carrying debt right now, it isn’t necessarily good news to just “break even.” You need to manage expenses to show a profit at your current revenue level—and that profit goes to pay down debt.

4. Retain and develop your top talent

During difficult economic times, your best people can be lured to competitors where they perceive the grass is greener. Ensure you communicate openly and transparently with your employees about the company’s situation. Now is also the time to offer them new challenges, new training, and new experiences to keep them where you need them. Depending on how you handle the situation, they can be your biggest advocates or your biggest liabilities. 

5. Top-grade your employees

In 1981 (amidst a recession), Jack Welsh gave a speech in New York City where he outlined a strategy for success for General Electric. Much of his strategy was related to improving the quality of company employees. His policy of firing the bottom 10% of his managers each year earned him a reputation for brutal honesty and respect. It is a model that even small businesses can learn from. When unemployment levels climb – as they have and will continue to do – more and more qualified and experienced people enter the workforce. 

This allows even small companies like yours to hire a level of talent that was inaccessible even a year ago. By increasing the quality of his managers and employees—and then raising the expectations of their performance—Welsh guided General Electric to success in the midst of economic difficulty and was named “Manager of the Century” by Fortune magazine.

6. Communicate with authenticity

Things are tough. Your employees know it, and so do you. By sharing challenges and struggles, leaders build trust. Having a leadership account filled with trust is one of the greatest assets you can have during a recession. Strive to be transparent about the company’s current state, the steps being taken to address challenges, and the rationale behind difficult decisions. This kind of openness helps alleviate uncertainty, rumors, and fear among employees. 

7. Simplify company goals

Entrepreneurs can be prone to a scattered approach to business. We tend to see opportunity everywhere—and we also tend to chase it. This can lead us to a state of being tyrannized by the demands—and the costs—of our own entrepreneurial passions. Focus on the core aspects of your business that generate the most value. That way, you can allocate your resources effectively and ensure that your efforts are not diluted across too many initiatives. 

8. Focus on quality

Jack Welsh decided that General Electric should only be in a business that could be #1 or #2. If they could not, they got out of business. This is a good model to apply to your focus on quality. Focus on the things your business does best. Spend your energies improving those things, and consider dropping products or services where your business cannot compete effectively. Quality over quantity can be a difference-maker when resources are limited. 

9. Protect yourself

Asset protection planning has never been more critical than it is today. The hard reality is that not every company – even well-run companies in good markets – will survive this economic cycle. Business failure can be devastating to everyone involved. But, the scars can be limited in scope, and it is much easier for entrepreneurs to be able to rise again to chase another dream if they have protected their assets along the way. The benefits and protections offered by Nevada corporations, limited liability companies, and LLLPs may be key to your financial survival.

10. Act now

This is “Survival of the Quickest.” Business owners who do not act quickly enough to today’s economic challenges can find themselves in a death spiral of cutting costs only after revenues slide. This becomes a spiral when this is repeated month after month. Would you rather operate from the strength of “What decision do I need to make?” or from the regret of “What decision do I wish I had made?” In any case, survival is possible, but it will take prompt action.

Amazon’s Growth During the Dot-Com Bubble Burst

After experiencing rapid growth during the dot-com boom, Amazon faced challenges when the bubble burst in the early 2000s. Despite a significant decline in stock prices and investor confidence, Amazon continued to innovate and expand its product offerings. The company introduced Amazon Web Services (AWS), a cloud computing platform, which later became a major revenue driver and contributed to Amazon’s resilience and long-term success.

Main Takeaway

Surviving a recession requires a combination of strategic planning, adaptability, and resilience. However, the key here is to anticipate and respond to market shifts before they become overwhelming and unbearable. This proactive approach can make all the difference between mere survival and emerging stronger in the aftermath.

At NCH, we empower businesses to not only weather economic downturns but to thrive amidst them. From business formation services to comprehensive asset protection strategies, we provide the tools you need to overcome uncertain times with confidence and clarity. Our experts will support your vision and ensure that every challenge becomes an opportunity for growth. 

Call 1-800-508-1729 or visit our website to learn more about our business formation services.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.