It was once said that astrology was invented so economics would seem like a more accurate science by comparison. Yet we listen with interest to the warnings of economists, as well we should. Many are calling for a recession in 2019 or 2020 and there is overwhelming evidence that we're at the end of a business cycle. It's not a matter of if, but when.
I wrote a post in January titled "Why 2018 Could Be the Best Year Ever to Be an Entrepreneur", and I stand by that headline. The U.S. economy has added a staggering one million jobs in the last year, about 70 percent of those in businesses with less than 500 employees.
Small businesses are on fire, and companies are investing. Wages are higher for the first time in a decade. Indicators of confidence such as production of heavy trucks, commercial and warehouse construction, and housing starts remain strong.
However, the WSJ/Vistage Small Business CEO Confidence Index, a bellwether for the mood of CEOs, is starting to show cracks in the armor, sliding to 105 in Q1 from an extraordinary 110 in Q4 of 2017. The potential of a trade war, tariffs, higher interest rates and other political uncertainty are the cold realities following a year of confidence buoyed by tax reform and reduced regulation. It's feeling like the calm before the storm.
Here are the facts already in evidence today. The longest recovery in U.S. history was eight years, and there were recoveries of roughly eight years under Reagan, Clinton and Bush Jr. The current recovery is unprecedented at nine years. While we are all feeling our oats and playing offense we should also be braced for impact.
Here are seven things every company should do to prepare for a downturn:
1. Understand the cycle you are in.
It's a bit of a misnomer to say we operate in a "business cycle." Every business operates within multiple cycles: business, monetary, industry life cycle and company life cycle. Understanding the inflection points in these cycles is critical to succeeding within them.
Many small businesses do not understand their own operating cash cycles. As a company grows, its cash position doesn't get better; it gets worse! A business typically has to pay costs such as custom development, inventory or labor before it receives revenue to cover such costs. Take time to create a cash flow statement to know exactly where you'll be for every month of the year.
This leads me to number two:
2. Make sure you don't run out of money.
It may seem oversimplified, but the hard reality is that many companies fail in recessions because they run out of capital. During the Great Recession, 18 percent of companies filed for bankruptcy. Responsible companies maintain a cash reserve of at least two months' cash flow.
3. Take price increases now.
For the first time in years, companies can rationalize price increases. Higher labor rates including healthcare and rising minimum wage provide justification to customers who are more accepting during a period of zero inflation. Interestingly enough, many companies have forgotten how to message price increases. Provide scripts to your salespeople on exactly what to say, and make an announcement justifying your position. Take price increases now because it's unlikely you will be able to in the future.
4. Utilize technology to improve engagement and reduce cost.
Many small companies struggle to find relevant software to serve their back end. Cloud-enabled office suites are emerging that are scalable and inexpensive.
For example, contemporary CRMs (customer relationship management) solutions allow you to create powerful drip campaigns, forms and automated responses for clients.
5. Stay close to the voice of the customer.
When your customers' businesses start to contract, their behavior will change. Being in front of them all the time is critical. If you maintain strategic relationships with the customer, you will have better indications about their strategic initiatives- ones you can participate in.
The B2C equivalent is listening to the voice of the customer through surveys, ratings and analytics. Look for even minor changes in consumer behavior that indicate trends you can take advantage of.
6. Secure financing and use other people's money.
During the Great Recession, regional banks became very conservative. Consider all your options and lock in your financing now. Remember that banks are least likely to lend money when you really need it. Cobble together three to four months of strong financial performance and ask to expand your credit line.
7. Manage your budget.
As companies migrate from the startup phase to being professionally managed, an important step they take is establishing budgets. Make sure you have multiple budgets that consider optimistic and pessimistic scenarios. Evaluate your budget carefully so you can reforecast midstream.