How to thrive during the next economic downturn
5 key strategies to help you respond to the disruption
Entrepreneurs know that the economy goes through cycles. Sometimes things are good and business booms. Other times, things are tough and entrepreneurs struggle. Markets go up and then go down and then, hopefully, go back up again. That just seems to be the way things go. But that doesn’t mean that you have to lose in a downturn.
Through our personal life we are surrounded by entrepreneurs. After many years of working with and for entrepreneurs, we have come to believe that you can survive a downturn and potentially even thrive through it or rebound quickly after it ends. Here are 5 key strategies to help you do this.
How To Think About Economic Downturns
If we understand that an economic downturn will come at some point in the future, then we know we have choices to make. One of the biggest choices we will make is how we view the downturn? Is it a ravager of our personal and business wealth? Is it a trial we simply have to endure? Or is it an opportunity to grow, to get great deals and to expand?
Most entrepreneurs do not welcome downturns because they create havoc. They disrupt business-as-usual. Many of the entrepreneurs we serve feel a strong connection between their business and their personal life. Income generated through the business passes through to the family.
But the same is true about stress. A stressful business environment can create stress at home. It’s hard for most business owners to leave work at the office. This is especially true for smaller family businesses that depend on the business for income. So before the next economic downturn comes, we believe there are three questions you have to ask yourself:
- Do you want to survive the downturn?
- Do you want to thrive and grow through the downturn?
- Do you want to get out before the next downturn?
While the counsel this article is designed to help you survive or thrive through an economic downturn, we believe it is a perfectly legitimate strategy to plan to exit before a downturn. Many entrepreneurs choose this path for a multitude of reasons including their age, their desire to avoid stress or even to start a different business.
5 Strategies For Responding To Economic Downturns
If you want to survive or thrive through the next economic downturn, you need a certain mental toughness. Resilience, drive, passion and an unwillingness to quit probably have more bearing on what happens to you in a downturn than any other factor. Some people just won’t quit and those people usually end up winning.
That being said, an unwillingness to quit does not necessarily protect you from major losses or financial pain. There is a great deal you can do now to prepare for the next downturn and have a strategy ready to go.
After serving and working with hundreds of entrepreneurs and watching them handle the ups and downs of economic swings, here are 5 lessons we’ve learned:
- Look ahead, not behind.
- Don’t get discouraged.
- Get clarity about your operating model.
- Do the market research that is necessary to understand your clients.
- Stick to your moral compass.
Let’s explore these a bit.
Look Ahead, Not Behind
One of the biggest reasons that businesses get wiped out in downturns is because entrepreneurs get caught off-guard and only take corrective actions after it’s too late. Most businesses can scale operations up or down if the leaders are given enough time. But time is the critical factor.
If you don’t want to get caught off-guard, you need to look ahead, not behind. It seems that many entrepreneurs are making decisions about the future based on the past. They look at the last several quarters of growth, operating expenses, profit and loss statements and even competitive benchmarks. All of these markers are backward-looking, not forward-looking.
One key to success when dealing with downturns is to anticipate what’s coming and to build flexible strategies that allow you to respond to whatever comes. It’s probably not enough to have A and B plans. You probably also need C and D plans. Entrepreneurs, by their nature, are optimists. If you weren’t optimistic about its performance, you wouldn’t have started your business in the first place. But don’t let that optimism prevent you from planning for the worst.
If you can anticipate what’s coming, you can put your plans in motion before the markets force you to make changes. How do you become anticipatory?
- Keep your thumb on the pulse of your industry.
- Attend tradeshows and conferences.
- Read articles from publications that track your industry.
- Join industry groups and listen to what people are saying.
- Follow analysts and thought-leaders who are well-regarded for your industry.
In virtually every major downturn we’ve seen in the last 50 years or so, the tell-tale signs of a market shift were evident long before the shift took place. If you look ahead and not behind, you put your company in the best position to respond to whatever comes.
Don’t Get Discouraged
Being an entrepreneur is not for the weak or faint-of-heart even in the best of times, let alone during a downturn. Those who thrive and expand through a downturn seem to have the greatest emotional resilience. They don’t get discouraged or give up, even when things look bleak. They keep looking for opportunities and prepare to act quickly once they come.
As an entrepreneur, you are in control of your destiny – far more than someone who is an employee. You can create plans, make decisions and execute strategies. An economic downturn creates stress on everyone and therein often lies the opportunity.
You can offer good long-term deals with clients, restructure debt, consolidate operations or roll-off business units that are not profitable. You can acquire businesses that are going under, attract new talent who are leaving their old jobs, lease new space for a much-reduced price and even buy valuable equipment that might be offered at a fire-sale.
There are so many options for entrepreneurs to respond to downturns. But you may not see them or be ready to take action if you are discouraged. Fear is indeed the enemy of entrepreneurs. But those who push past it and look for opportunities can be the winners.
Get Clarity About Your Operating Model
Cash-flows and cash reserves will likely determine the range of options available to you during an economic downturn. If you run out of cash, it’s probably over. But if you are cash-flush and have reserves, you will usually feel confident and possibly even take advantage of the downturn.
This is why we recommend having clarity about your operating model today. An operating model is – simply put – what it takes to run a profitable company. This includes financial statements but it’s not primarily about financial statements. Those tell you what has happened.
An operating model can tell you what will happen to your business if you continue to operate as you have in the past. An operating model should include at least these components:
- Advertising and client acquisition expenses
- Cash-flows and financial projections
- Employee performance
- Debts and debt servicing
- Taxes – both business and personal taxes
- Investments you need to make to remain competitive and how you’ll finance those
We often find that entrepreneurs make assumptions about how their operating model works, but sometimes those assumptions do not hold when market disruption occurs. When you clearly understand your operating model, you put yourself in the best position to tweak it during a downturn. For instance, you could:
- Increase advertising to acquire new customers (especially from competitors who might be going out of business).
- Ask employees to increase output and incentivise them to do so.
- Restructure debt to enhance monthly cash-flows.
- Strategically plan to take advantage of tax benefits and incentives based on constantly changing tax law.
- Take losses on your business taxes to off-set personal income taxes.
- Wait to invest in new technologies until the economic downturn reaches bottom.
Do The Market Research That Is Necessary To Understand Your Customers
Downturns scare a lot of people and often change their mindset. This is why we recommend that you do the market research that is necessary to understand your customers and how they see the downturn. How will their needs and economic behaviours change through a downturn?
The more you can understand what your customers value and will pay for (or won’t pay for), the more accurately you can change your product or service strategy based on what you see coming.
For instance, during the last recession, new-car sales fell but car-repairs jumped. People held on to older cars longer because they weren’t sure when the recession would end. They didn’t want to saddle their households with unnecessary debt.
A company we served many years ago did not anticipate that their investment in expensive products was not sustainable. Through the downturn, customers were looking to save money by buying less-expensive products. The owner was not prepared to make a shift in his product base and suffered because of it. Listening and responding to the needs and goals of your customer-base is a crucial key to weathering the change of any economic cycle.
Stick To Your Moral Compass
Just because things get ugly, this doesn’t mean that you should change your values. Entrepreneurs have it within their power to impact the lives of so many people – their own families, their employees and their families and their customers and their families.
When you stand by your ethics and values even when it gets tough, people will notice. This creates good will and trust – even admiration. We believe most consumers want to support good people and companies with good values. Consumers want great products and a fair deal, but they also want their dollars to go into organisations they can believe in.
There are all sorts of ways to scale your operations through a downturn and maintain your integrity. We have helped many clients do this. We take great pride in helping our clients create strategies to respond to market downturns. We believe our support and attentiveness during these difficult moments actually represents some of the very best characteristics of who we are as a team.
How Can We Help?
If you’re like many entrepreneurs, it’s probably in the back of your mind already that a downturn may be ahead. None of us know or can predict the future. But there are many things you can do to anticipate what’s coming and create a strategy that is right for your situation and family. If this is something you’ve been thinking about, we should have a conversation. Call Alliotts in Auckland on +64 9 520 9200.
Source Alliott Group