How to prepare for an economic downturn

Julie Palmer

Regional Managing Partner

4 Minutes to read

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How to prepare for an economic downturn

Updated: 11th February 2020

Preparing for an Economic Slump

After a long period of economic growth, a global recession within the next couple of years is predicted by many experts. Volatile stock markets and a decrease in global growth over the past two years from 4% to 2.9% suggest harsher conditions could be around the corner.

While we cannot predict the future nor say with any certainty when the next period of economic downturn is going to happen, we can learn from the past and heed the warning signs when it looks like history is likely to repeat itself. The economy moves in cycles and it is highly likely that many of us will experience another recession at least, in our lifetimes. While no recession is identical; varying in length and severity, coupled with challenges unique to the current business landscape, lessons can still be learnt from the economic downturns of the past.

Preparation is key

Preparation can help you manage a downturn and come out the other end relatively unscathed. Taking steps now can help ensure a company is prepared to weather an approaching storm rather than being caught unawares and without a strategy to execute resulting in the company being late to react to changing conditions and having to make key decisions while in crisis mode.

Having an idea about how your business will react and adapt to a challenging economy is not about panicking but about being ready to make strategic changes as and when market conditions dictate them necessary.

Reducing liabilities and improving efficiencies

A challenging economic climate can force companies into streamlining and addressing weaknesses which may otherwise have been allowed to continue. Divesting of less profitable assets or divisions of the business and operating within a more simplified structure can allow for funds to be channelled to core parts of the business with wastage being reduced and efficiency increased.

The more efficient your business is now, the better placed it is to survive a recession or periods of downswing. With lower operating costs and low debt, the greater the buffer there is to weather a drop in income or rising interest rates. Stress testing your business against a range of possible situations is perhaps the most accurate way of determining how prepared the company is for tougher trading conditions.

"The economy moves in cycles and it is highly likely that many of us will experience another recession at least, in our lifetimes."

Remain agile and embrace change

It is not about throwing out the rule book and completely overhauling the operations of the company, but making key strategic and operational changes to better reflect the state of the market. Those businesses which carry on regardless and obstinately refuse to modify their operations are playing a high risk strategy.

Practical measures such as cutting costs, minimising reliance on third party borrowing, and improving efficiency can all set your company in good stead for the future. Upskilling workers and identifying key employees whose skills and experience you need to retain can help you focus on how the company could look in the future. You may want to consider putting a lid on further investment, however, it is often wise not be too defensive.

Remember to plan for market recovery

It is wise to remember that just as good times don’t last forever, neither do bad times. While growth is undoubtedly difficult during a downturn, long-term growth is still possible once a recession is lifted. Finding that balance between trimming costs and streamlining operations to save vital funds now, while still retaining a viable business underneath is key. While recessions are never pleasant, it should be remembered that the longest recession on record, The Great Depression, lasted three and a half years, with the recessions which have followed typically lasting less than a year. However, fail to properly prepare for such an event and the negative effects can still be felt several years later.

While your primary concern may be to get out of the recession as unscathed as possible, a challenging economic landscape can also be a time of opportunity. Carefully considered investment in certain areas can reap huge rewards when the effects of the recession ease, particularly if competitors have taken their foot off the gas in an effort to conserve funds as much as possible.

Opportunities within the challenges

As less resilient and highly leveraged businesses struggle to cope, the opening is there for better prepared companies to swoop in. While some sectors will be disproportionately hit, particularly those falling into discretionary spending categories such as casual dining, consumer retail, and hospitality; other products such as like food will always be required, and more challenging financial times opens up the opportunity for other sectors to capitalise on shifting consumer behaviour.

Diversifying your product or service offering can open up a whole new market and ensure you keep ahead of the curve. Continued sensible investment in the company during challenging times puts you in great stead to leap ahead when the economy improves; as less resilient companies are focusing on rebuilding lost ground, those which have remained stable will be ready to seize upon an upswing in fortunes. Taking the time to plan ahead for an economic downturn puts you in the best position not only to survive this period, but to come out of it stronger.