How Companies Can Safeguard Against Recessions

Tough times have affected businesses worldwide in recent years, testing both owners and their companies. As a leader, it is important to develop resilience, local agility, and portfolio agility to prepare for future economic downturns.

How Laggards and Docile Companies Fare Better

A study conducted in 2008 found that during a recession, companies that were lagging behind industry leaders were twice as likely to surpass them compared to non-recessionary periods. Another study in 2019, which examined nearly 4,000 global companies before, during, and after the Great Recession, revealed that the top-performing companies experienced a 17% annual growth in earnings during the downturn, while the laggards saw their profits stagnate or decline. This difference between the two groups translated into an average of $6 billion in enterprise value.

Managing Uncertainty

Leaders can take a series of steps to boost an organization’s resilience and ability to withstand environmental shocks.

To manage uncertainty effectively, leaders can focus on three key aspects:

Resilience: Building a strong balance sheet and diversifying cash flows are among the steps that leaders can take to enhance an organization's resilience and ability to withstand environmental shocks.
Local agility: The ability of different business units, functions, and teams to adapt quickly and effectively to changes in their specific circumstances.
Portfolio Agility: enables companies to shift resources efficiently across different parts of the business. This flexibility allows businesses to seize opportunities and invest in their most promising ventures, which can drive revenue growth and shareholder returns.

7 Ways to Build Organizational Resilience

In addition to reducing debt and stockpiling cash, these seven options can also help build organizational resilience.

A strong balance sheet allows leaders to avoid short-term choices, such as layoffs or cutbacks.
Secure access to external financing enables companies to invest for the future while competitors tighten their belts.
Capitalizing on company size by lobbying for government support and gaining leeway to offload assets and reduce head count.
Diversification generates diverse growth options and the resources to fund them.
Low fixed costs enable companies to easily scale back operations in the face of declining demand and to remain profitable, even if prices drop.
Non-core assets, such as freestanding business units, brands, patents, real estate, and mineral reserves, act as stores of value that can be sold to raise cash.
Recession-resistant customers generate reliable sales through the business cycle.

What can you do today?

For business owners, there are three steps they can take today to mitigate the negative impacts of a down economy.

Evaluate banking relationships, considering factors, such as the institution's ability to weather economic storms, its cost-effectiveness, and its presence in the relevant markets.
Invest "behind the curve" by hoarding cash, reducing expenses, and making investments based on quarterly performance.
Define key performance indicators (KPIs) for predicting future revenue and identify areas that may require adjustments.

Regardless of the option you select, following these steps will aid in fortifying your business, enabling it to remain resilient in the face of any challenges that may arise.

Need Help?

If you are concerned about how a recession might impact your company, give us a call. We have been serving Iowa manufacturers and distributors for more than seven decades, and would be happy to help you as well.