How to Profit in the Coming Recession

Norm Brodsky

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Third, I watch the pool of job applicants. Like most businesses, we have a hard time finding certain types of employees--part-time truck drivers, for example. When the recession comes, we'll see a sharp rise in applications for those jobs from people with experience and long-term employment records, because other companies will have begun cutting back.

But maybe the best indicator of an oncoming recession is a slowdown in receivables as people start to conserve cash. It can happen very gradually. With everything else going on, it's easy to miss. Then one day you wake up and discover your collection time has increased 10%--from, say, 32 days to 35.

That increase alone doesn't prove a recession has started. You may just have grown sloppy. I'd look at the accumulation of evidence before doing anything drastic. I wouldn't cut prices, for example, until all the indicators are pointing in the same direction and you feel certain the economy has crossed the line.

But that doesn't mean you can ignore a slowdown in receivables. On the contrary, you have to jump on it immediately. You have to hire more collectors, speed up billing, do everything you can to get the number of days back down. And I wouldn't stop at 32 days if you think a recession is coming. I'd work the collection time all the way down to 29 days. Why? Because cash is king in a recession. You're going to need all you can get.

Mobilize your people to save jobs
Fear usually breeds bad morale, and recessions are scary times for employees. You can use the crisis to bring people together, however, by letting them know up front that you're committed to preserving their jobs and that they can help. How? By finding ways to cut costs.

And you do have to cut costs. If you're going to reduce prices, maintain profits, and conserve cash, you need to look at every expense, both shortand long-term, and decide what can go. There's only one category I'd put offlimits: sales-and-marketing expenses. I wouldn't touch them at all, for reasons I'll explain below, but everything else needs to be scrutinized closely.

Of course, you probably think you watch expenses as it is. I tell myself the same thing. It's baloney. Every company I know suffers from creeping expenses, and the condition gets worse during periods of prolonged economic expansion. When the recession comes, you have to separate the luxuries from the true necessities, and you can't do it alone.

For example, we hold two big parties for employees every year. They're good for morale, but together they cost as much as one annual salary. I'd rather suspend the parties--and save a job--while the recession lasts, but I'll probably let the employees decide.

We also spend a lot of money on season tickets to professional sports games. We use them to reward employees and entertain customers. There are other ways to do both and to cut our overhead in the process.

In addition, we can sharpen our buying. Maybe we should consider switching telephone carriers or refinancing our leasing arrangements. Maybe we should look for a better deal on insurance. There's a myriad of possibilities--things we should no doubt have been doing all along but tend to let slide when business is good. In a recession you need to put cost cutting back on the front burner and get your people involved. For one thing, they're likely to come up with ideas you'd never think of. More important, you'll be sending a strong message that you aren't going to abandon them in tough times.

Go out and sell
It's ironic to me that going into a downturn, most companies cut first the one type of expense they shouldn't cut at all: advertising. A recession is the best time to advertise. You'll never have a better chance to expand your business. Why? Because everybody is asking the same questions you are. "How can I save money?" "How can I survive?" People are willing to listen to anyone who can help them come up with an answer. They're open as never before.

If you've set yourself up as the low-cost provider; if you've moved quickly at the start of the recession; if you've stayed on top of your receivables, mobilized your people, reduced your expenses; in other words, if you've done all the other things I've talked about here, you'll be in an ideal position to add new customers--provided they know what you have to offer. To take advantage of the opportunity, you need to put every spare cent you have into getting out the message.

At the same time, you have to confront another challenge. I'm talking about deciding whether or not to add capacity, increase inventory, and do whatever else is required to make sure you can take care of those new customers once you get them.

It's a real dilemma. You take a risk when you tie up cash in assets you may not need during the hard times ahead. If you guess wrong, you could find yourself with a lot of slow inventory or excess capacity at the same time you're engaged in a desperate struggle to raise cash to cover your expenses. On the other hand, you also take a risk if you try to grow without having the ability to meet the demand you generate.

I'm facing that choice right now. We're building a new warehouse, which I expect will be filled within a year or so. In April I'll have to decide whether or not to start construction on a second warehouse. If we grow as I anticipate, we're going to need the additional space, and it's much cheaper for us to build our own storage facility than it is to buy or lease someone else's.

Then again, I don't want to be caught short of cash in a recession, especially if it's accompanied by serious price deflation--which is certainly possible. Believe me, I'll be watching the signs like a hawk.

Of course, there's a chance I'm wrong and we won't have a recession after all. I was wrong three years ago. What happened? We left prices where they were, and the company grew like crazy.

Having a plan doesn't mean that you implement all parts of it at once. I'm not suggesting that anyone start cutting prices before it's necessary. On the contrary, I believe strongly in keeping gross margins as high as possible for as long as possible. It will kill me if I'm forced to cut mine by three or four percentage points. I won't sleep nights until we get our overhead expenses low enough to make up the difference.

But we don't have to cross that bridge yet, and maybe we never will. In the meantime there are many other things we can do to get prepared, most of which we should be doing anyway. You should do them, too, whether or not you believe my prediction. At worst, you'll wind up with a stronger, more profitable company in three years.

Then you can tell me I was wrong again.

Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and a three-time Inc. 500 company. This column was coauthored by Bo Burlingham.

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