In 2000, Amazon, a five-year-old online bookseller, sold $672 million in convertible bonds to preserve its financial stability. The dot-com bubble burst one month later. Over the next few years, over half of all digital firms went bankrupt—including many of Amazon’s early rivals in e-commerce. Had the bubble popped just a few weeks earlier, one of the most successful businesses might have succumbed to the recession.
Recessions periods of negative economic growth lasting two successive quarters—can be induced by several factors, including economic surprises (such as an increase in oil costs), financial panics (such as the one that preceded the Great Recession), and fast fluctuations in economic expectations (the so-called “animal spirits” described by John Maynard Keynes; this is what triggered the dot-com bubble to burst). Most businesses suffer during a recession because demand (and revenue) declines, and uncertainty about the future rises. However, research shows that there are ways to reduce the harm.
According to an HBR article from 2010, “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen discovered that 17% of the 4,700 public firms they examined fared particularly badly during the recessions of 1980, 1990, and 2000: They went bankrupt, were acquired, or went private. But this proportion was even more dramatic: 9% of businesses didn’t merely recover in the three years after a recession; rather, they outperformed their rivals by at least 10% in sales and profit growth. The study found that greater income inequality leads to lower economic growth. A recent analysis by Bain using data from the Great Recession confirmed this finding. The top 10% of firms in Bain’s research saw earnings climb gradually throughout the period and continue to rise afterward.
Preparation was the difference. According to the Bain study, “only a few made contingency plans or considered different scenarios,” and “when the recession hit, they switched to survival mode, making significant cuts and reacting defensively.” Many companies that merely sluggishly recover from recessions never reach their previous heights of success.
Deleverage Before a Downturn
Even if you’re not recession-proof, you can recession-resistant your business by tweaking in the good times. For example, research from management consulting firm Bain & Company found that companies that deleverage—reduce their debt-to-equity ratios—before a recession hit performed much better than those that didn’t. In fact, for every 1% increase in a company’s debt-to-equity ratio, there was an associated 2.5% drop in sales during the recession.
During the recession, businesses with high debt-to-equity ratios had to spend more on interest payments and had less money to reinvest in their businesses. As a result, they were less able to weather the storm and had to make more drastic cuts, further hurting their bottom lines. The takeaway? If you’re carrying a lot of debt, now is the time to start paying it down. That way, you’ll be in a better position to weather any future economic downturns.
Invest in Your Employees
Another way to recession-proof your business is to invest in your employees. When times are good, cutting costs by trimming your workforce or freezing salaries can be tempting. However, research from the Harvard Business Review shows that companies that maintain or increase their investments in employee training during an economic downturn are more likely to come out ahead when the recession ends.
Companies that increased their investments in employee training during the last recession outperformed those that cut back by 2.5% in terms of market share and profitability when the recession ended. The takeaway? Investing in your employees—even when times are tough—can pay off in the long run.
There you have it: a few ways to recession-proof your business. By deleveraging, investing in your employees, and preparing for the worst, you can help ensure that your business comes ahead even when the economy takes a turn. Companies that increased their investments in employee training during the last recession outperformed those that cut back by 2.5% in terms of market share and profitability when the recession ended.
Focus on Decision Making
What separates the companies that weather recessionary storms from those that don’t is often their approach to decision-making. According to a 2009 Harvard Business Review article, businesses that make decisions quickly and decisively are more likely to come out ahead during an economic downturn. The article cites research from the University of Pennsylvania’s Wharton School, which found that companies that made decisions quickly and efficiently outperformed those that didn’t by 2.5% in terms of market share and profitability when the recession ended.
The takeaway? When it comes to making decisions, speed is key. The faster you can decide, the better off you’ll be. So there you have it: a few ways to recession-proof your business. By deleveraging, investing in your employees, and preparing for the worst, you can help ensure that your business comes ahead even when the economy takes a turn. When it comes to making decisions, speed is key. The faster you can decide, the better off you’ll be. So there you have it: a few ways to recession-proof your business. By deleveraging, investing in your employees, and preparing for the worst, you can help ensure that your business comes ahead even when the economy takes a turn. Focus on decision-making and time efficiency will help companies weather any recessionary storm.
Look Beyond Layoffs
It can be tempting to focus on cutting costs by reducing your workforce in difficult economic times. However, layoffs should be a last resort. Not only are they disruptive to your business, but they can also hurt morale and productivity. Instead of laying off employees, look for other ways to reduce costs. For example, you could offer voluntary pay cuts or reduced hours. You could also put a hiring freeze in place or offer early retirement packages. All these options will help you reduce costs without letting go of your most valuable assets: your people.
The takeaway? When it comes to recession-proofing your business, think outside the box. There are many ways to reduce costs without resorting to layoffs. So there you have it: a few ways to recession-proof your business. By deleveraging, investing in your employees, and preparing for the worst, you can help ensure that your business comes ahead even when the economy takes a turn. When it comes to making decisions, speed is key. The faster you can decide, the better off you’ll be. And finally, don’t forget to think outside the box when cutting costs. There are many ways to reduce expenses without having to layoffs employees.
Firms invest in IT during recessions because their opportunity cost is lower.
In other regions, policymakers propose shorter hours as an alternative to job cuts. Many countries and over half of the states in the United States have a “short-time” compensation program in which employees whose hours are reduced receive partial unemployment payments. In 2009, 4% of workers and 1% of businesses used France’s short-time work programs, with both groups receiving important benefits.
Pierre Cahuc, Francis Kramarz, and Sandra Nevoux of the European think tank Centre for Economic Policy Research discovered in a 2018 discussion paper that firms that utilized the short-time work program fired fewer employees and were more likely to survive the Great Recession. The impact was most significant among those businesses hit hardest by the recession and those with the highest debt levels. According to the researchers, this approach allowed weak companies to keep more workers.
Many of these companies, without the aid, would have had to fire more staff, making it more difficult to recover from the recession or forcing them to go out of business. According to the researchers’ findings, one job was preserved for every five employees placed in short-time employment. They also estimate that the cost per position saved was less than comparable programs; because paying unemployment was the only option.
Both furloughs and short-time employment have several advantages, one of which is that employers have wide leeway in deciding who is affected. By contrast, across-the-board pay cuts or hiring freezes that do not take employee productivity into account may backfire, harm morale, and drive away the most productive employees. Similarly, hiring freezes affect every department equally without considering each prospective hire’s value.
Other Ways of Controlling labor expenses:
Another approach for controlling labor expenses without impairing output is using performance pay based on productivity or business outcome. There’s a long-standing debate about performance pay and plenty of evidence. However, recent research by Christos Makridis (of the White House Council of Economic Advisers) and Maury Gittleman (of the US Bureau of Labor Statistics) establishes an important fact: Performance pay – compensation linked to some measure of productivity or business achievement – is another way to manage costs while maintaining competitiveness.
According to the research, performance pay is used far more frequently in the United States than previously assumed. The study finds that U.S. businesses rely on performance pay more regularly in economic downturns. Although they can’t say whether this approach works for firms, they find that a specific profession is more likely to be rewarded through performance pay when times are tough. They believe that because performance compensation aligns workers’ incentives with changing conditions, it makes companies more flexible.
No one wants to experience a recession, but unfortunately, they are a fact of life. Just like storms, recessions can be unpredictable and destructive. The key to surviving a recession is to be prepared for it. Here are some tips on how you can survive a recession and even thrive afterward:
1. Have an emergency fund.
This is one of the most important things you can do to prepare for a recession. An emergency fund will help you cover unexpected expenses during tough economic times. Aim to have at least three to six months of living expenses saved so that you can weather any storm.
2. Invest in yourself.
During a recession, it’s important to invest in yourself. Whether taking a class to improve your skillset or networking to make new connections, recession-proofing your career will help you weather the storm.
3. Live below your means.
One of the best things you can do during a recession is to live below your means. This will help you save money and put you in a better position to weather any financial hardships that may come your way.
4. Stay positive.
It’s important to stay positive during a recession. Remember that recessions are temporary and that they eventually end. Focus on the future and believe that better times are ahead.
How Can Cyberium Help?
Cyberium can help you recession-proof your business with our affordable, high-quality IT services. We can help you cut costs without sacrificing quality or service. Contact us today to learn more about how we can help you weather any storm.
How to Proactively Recession-Proof Your Business