Does a recession look likely down the road? Economists call a recession when two straight quarters of negative economic growth occur. Currently, the U.S. economy is robust by some measures and looks stable. However, observers are increasingly forecasting a recession in 2020 or beyond.
Recessions Can Be Bad for Business…
Recessions are almost never good news for business because shrinking economic growth affects a number of factors that help business thrive in good times. Consumer pocketbooks shrink because of layoffs or fewer working hours and, therefore, consumer demand falls also. Businesses are less robust, so their demand slackens as well. Falling demand begets falling revenue.
How bad is the news for businesses in recessions? Well, after the collapse of the dot.com bubble in 2000, over 50 percent of digital startups went out of business within the next several years, according to a recent Harvard Business Review. In a larger study of 4,700 public companies, researchers found that 17 percent either entered bankruptcy, were acquired, or became private companies rather than remaining public as a result of recessions.
High levels of debt service can hurt companies.
…but There Are Ways to Win
Not all companies perished or suffered, however. Nine percent of companies in the study did very well during recessions, beating the sales and revenues of competitors by 10 percent or more.
How do businesses do well or at least survive during a recession? It takes planning. Recessions are inevitable; while businesses may not be able to predict the timing, economic downturns occur regularly.
The HBR suggests the following steps to make it through a recession.
- Minimize or eliminate debt
While debt can help businesses expand, it can be perilous in a recession. Why? Because high levels of debt can become difficult to impossible to service when revenues and profits are falling.
In fact, most companies that go out of business in a recession are highly leveraged.
The solution is to minimize or eliminate debt. Think in terms of business strategy, of course; it may be possible to sell assets and make other changes to deleverage.
2. Gather data from multiple sources
Companies usually either make decisions in a centralized manner or a decentralized manner. Centralized companies may have a strong picture of the company as a whole. However, decentralized firms may have better information about the economy in a recession, because the information in a recession can vary according to locale. Decentralized information can help in a recession, not hinder.
3. Handle employee reductions strategically
Laying employees off almost always occurs as corporate revenues and profits drop. During 2009, for example, more than 2 million Americans were laid off as a result of the Great Recession.
However, business leadership should consider the costs of layoffs along with potential savings. Layoffs essentially mean that rehiring and training will be needed at some point – and rehiring and training cost money. Layoffs can also dampen or destroy morale and loyalty.
To make it through the recession, companies can also reduce their labor costs in other ways, such as reductions of hours, furloughs, and performance pay.