How To Prep For A Recession By Strengthening Your Business Foundation

Edward Tuorinsky, Managing Principal of DTS, brings two decades of experience in management consulting and information technology services.

Signs are starting to point to a recession just as businesses were hoping to emerge from the pandemic times. The economy is the latest challenge in a string of unnerving events for businesses and their leadership. How you respond now will determine where you land after this storm has passed.

I’ve always found that in times of turmoil, it’s best to go back to the basics. The strategies that build a strong business foundation can carry you past any number of obstacles or roadblocks. And starting early is its own advantage; while others panic or scurry later, you’ll already have a plan. Begin with five foundational strategies:

1. Set a budget and shore up cash reserves.

Creating and tracking a budget provides insight into how you’re spending your money and your cash flow throughout the year. In lean times, it’s more important than ever to have a detailed plan for the expenses you know you’ll have, from employee pay raises to insurance premiums to hardware upgrades, as well as the activities you know you need to do, like protecting data and systems or complying with industry regulations. I encourage you to think through every line item, right down to hosting next year’s holiday party and work perks like gym memberships. That level of detail allows you to make choices quickly if you need to free up cash.

And speaking of cash reserves, 90 days’ worth, or the equivalent of 4-6 payrolls, is the amount of cash you need to have access to. If you don’t already have lines of credit, the time to set that into motion is before you need it and, hopefully, before there’s more of an economic downturn. Better to have it and not need it than to need it and not have it.

Finally, reduce any outstanding invoices and hang on to those funds. Create a worst-case plan for your finances to help you anticipate areas of risk or decisions that could have financial impacts.

2. Concentrate on excellence.

Identify your most profitable activities and focus your energy there. Look to your foundational strengths, competencies and your best customers for the answer. With this knowledge, you’ll be ready to make decisions regarding headcount, resource allocation and optimization without negatively impacting your core operations or client delivery. Look for areas where gains in efficiency—through internal processes, procedures, automation, marketing, etc.—would benefit customers. If you have to make cuts in the coming months, you should avoid anything that directly affects your customers, your products or services or your quality.

3. Emphasize client retention and client selection.

It’s always important to understand what customers are looking for and why they work with you—doubly so when times are tight. Good customers are hard to find but easy to lose, so focus on client retention by personalizing the client experience. That means providing quality outreach and attention and thoughtful, value-added services. This could be something as simple as providing recommendations or best-practice guidance for clients based on the data you collect.

On the flip side, beware of costly customers. These are the ones who are eating up a disproportional amount of time and resources—and hurting your ability to retain (or motivate) top talent. A little analysis will help you determine when an annoying customer becomes too costly for your concentrated excellence strategy.

4. Continue attracting new business.

Traditionally the first cuts in hard times include advertising, marketing and sales. It’s a risky move since those are also the functions driving new customers in the door. Look carefully at your return on investment in each of these areas and consider the opportunity to grab more market share while competitors go silent. It could be a chance to use your innovation and strengths to sustain the company through lean times.

5. Cultivate new leadership.

Identify the difference makers and culture leaders in your organization. Be transparent about where your company stands and what your plans are to see superstars arise. Invest in these employees with mentoring, coaching and opportunities to gain diverse experience. They are more likely to stick with you when you ask them to do more with less and to be pillars of strength when making cuts or reorganizing teams. Those who emerge as leaders will already be earmarked for new initiatives once you’re ready to branch out again.

Seeing the early warning signs of trouble ahead for your business? Be honest and communicate with your employees proactively. I know many leaders hate asking for help but getting your company through tough economic times takes everyone working together—in essence, you are asking your employees to help in ways that benefit everyone. Sharing the strategies you’ll use to weather the storm can be a powerful motivator for your team as they help strengthen the foundation to make the business emerge stronger.

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