How to brace for a market downturn?

Ah, recessions - the economic equivalent of a dreaded flu season. Just when you think things are going smoothly, the economy catches a cold and suddenly everyone is feeling the impact. But, as much as we may wish for an eternal summer of economic growth and prosperity, recessions are an inevitable part of the capitalist cycle.

The impact of an economic downturn is ubiquitous. The uncertainty of market conditions, shifting consumer habits, and tightened budgets can leave even the most seasoned business leaders feeling anxious and overwhelmed. But before delving into navigating these challenging times, it's important to establish a clear understanding of what a recession entails.

Recession: 101

So, a recession is a time of economic downturn that is often defined by a fall in the GDP, high unemployment rates, and a general slowdown in economic activity. Simply put, it occurs when the economy begins to tank and things begin to deteriorate.

When a recession hits, it can have a ripple effect throughout the entire economy. Companies might need to reduce their output, which could result in layoffs and greater unemployment rates. Consumer spending declines, making businesses even more difficult to operate. When investors grow cautious about the economy, the stock market also suffers. Although they can be challenging and perhaps even painful to experience, they are a normal component of the economic cycle.

How do I know it’s a recession?

The concept of a recession is not as straightforward as it may seem, and there is no universal consensus even among economists on what qualifies as a recession. Although economists may have varying definitions of what constitutes a recession, certain indicators are commonly considered to be telltale signs of an economic downturn.

  1. A decline in Gross Domestic Product:

Think about it: when an economy experiences a significant drop in GDP, it means that businesses and individuals are producing and spending less. This, in turn, leads to lower employment rates and weaker consumer confidence.

We saw this happen in the 2008 recession. As more and more people defaulted on their mortgages, banks, and financial institutions suffered major losses, leading to a widespread market downturn. According to the National Bureau of Economic Research, GDP fell by 30% during this time, while unemployment soared to a staggering 25%.

  1. A decline in real income:

A decline in real income was all too apparent during the Great Depression (1929 - 1933). The average income of an American family saw a drop of 35%

The 2008 recession also saw a significant reduction in real income, with median household income falling by 4.2% between 2007 and 2010, according to the U.S. Census Bureau.

A decline in real income is a challenging but not insurmountable obstacle to overcome during a recession

  1. A decline in industrial production:

When factories and manufacturers are producing fewer goods, it means that demand is dropping and businesses are feeling the pinch. This can lead to layoffs, lower consumer spending, and a whole host of other economic woes. It's like a game of Jenga - pull out one block (in this case, industrial production) and the whole tower can come crashing down.

During the Great Depression, industrial production plummeted by a staggering 47%.

  1. A decline in retail and wholesale sales:

A decline in retail and wholesale sales is a sign that consumers are cutting back and it can be a harbinger of tougher economic times. It's like when your bank account balance drops below a certain amount and you know it's time to start pinching pennies.

During the Great Depression, retail sales declined significantly, with a staggering 25% drop in sales. Wholesale sales saw a similar fate, with a 28% drop in sales during the same period.

One of the reasons why a decline in retail and wholesale sales is such a strong indicator of a recession is that it affects a wide range of businesses. Moreover, retail and wholesale sales tend to be a leading indicator of a recession since they are typically the first sectors to experience a decline.

  1. A decline in employment:

When employment rates start to drop, it's like the economy's way of saying "Houston, we have a problem." After all, when people aren't getting hired, it means that businesses aren't growing, and that's bad news for everyone. Unemployment can lead to a whole host of problems, from lower consumer spending to decreased confidence in the economy.

The COVID-19 pandemic had a massive impact on employment rates. In April 2020, the unemployment rate hit a record high of 14.8%, which is the highest rate since the Great Depression of the 1930s.

How do I weather it?

Reduce Debt

Back in the early 2000s, the dot-com bubble burst and many companies were struggling to survive. Amazon, however, was able to weather the storm and even come out stronger on the other side. By having the foresight to raise a lot of money before the downturn hit and then using that capital to reduce their debt.

You see, if Amazon had been saddled with a lot of debt during that time, it would have been in a much tougher position. They wouldn't have had the financial flexibility to absorb losses in their investments or to launch new platforms like Amazon Marketplace.

Here’s how to decrease your debt -

A. Take stock of your current debt situation:

This means taking a comprehensive look at all your outstanding debts, including credit card debt, loans, mortgages, and other financial obligations. This allows you to develop a comprehensive plan for paying down your debts, prioritize which debts to pay off first and avoid financial surprises or setbacks.

B. Prioritize high-interest debt:

The higher the interest rate, the more you'll end up paying over time, so focus on paying off those debts first. Consider consolidating your debts with a low-interest personal loan, which can help simplify your payments and save you money on interest.

C. Create a budget:

Look for areas where you can cut back on expenses and redirect that money toward paying off your debts. If you have multiple credit cards, try to pay off the one with the highest interest rate first, while still making the minimum payments on the others.

Deleveraging your debt is a challenging yet important process to surviving a recession.

Risk management

Risk management is all about identifying potential hazards, and developing a plan to protect your assets. One of the most important tools in your risk management arsenal is diversification. Spread your investments across a variety of asset classes and sectors, so you don't have all your eggs in one basket.

If you're a business owner, risk management is crucial for ensuring your company's survival in a recession. You might need to develop contingency plans for different scenarios, like a drop in sales or supply chain disruptions.

Make data-driven decisions

In a nutshell, making data-driven decisions means using cold, hard facts and numbers to inform your choices.

  1. Collect and analyze relevant data. This involves tracking your expenses, monitoring industry trends, or conducting market research.
  2. Use analytical tools like spreadsheets, graphs, or even softwares to help analyze the data you have collected.
  3. Once you've analyzed the data, it's time to take action and make informed decisions based on the insights you've gathered.

Of course, data isn't the only factor to consider when making decisions. Gut instincts and experience also play a role. But by using data to inform your decisions, you can reduce the risk of making costly mistakes or falling victim to common cognitive biases.

Look beyond organizational restructuring

When preparing for a recession, it's important to think outside the box - or in this case, outside the organizational chart. Looking beyond organizational structure means focusing on the people and processes that make your organization tick, rather than just the hierarchy.

  1. For example, you might identify key employees who have unique skills or expertise that could be leveraged in new ways during a recession.
  2. Look for inefficiencies in your processes and find ways to streamline them. This could involve using technology to automate tasks or reorganizing teams to improve collaboration and communication

While it's true that some layoffs may be unavoidable during a downturn, the most successful companies during the Great Recession took a different approach.

Play offense & defense

This means that you need to be proactive in seeking out opportunities to grow your business, while also being prepared to defend yourself against the inevitable market downturn.

  1. Play offense: Playing offense means being bold and proactive in pursuing growth opportunities for your business. This might mean investing in new marketing strategies, expanding your product or service offerings, or seeking out new partnerships and collaborations.

    By being proactive in seeking out new opportunities for growth, you can help insulate your business against the negative impacts of a recession

  2. At the same time, it's also important to play defense. This means being prepared for the worst-case scenario and taking steps to protect your business from the potential impacts of a recession. This might mean cutting back on expenses, renegotiating contracts with suppliers and vendors, and shoring up your cash reserves.

Ultimately, the key to playing offense and defense is balance. You don't want to be so focused on growth that you neglect to prepare for a potential downturn, but you also don't want to be so focused on defense that you miss out on opportunities for growth and expansion.

Strengthen your team

Your employees are the lifeblood of your business, and in tough times, you need a team that can work together, innovate, and adapt to changing circumstances.

  1. Foster a culture of collaboration: This means breaking down silos and encouraging cross-functional collaboration. By fostering a sense of camaraderie and shared purpose, you can create a team that is stronger than the sum of its parts.
  2. Employee engagement and motivation: This means recognizing and rewarding good work, providing opportunities for growth and advancement, and creating a positive work environment that fosters creativity and innovation.
  3. Leadership: During a recession, your team needs strong, decisive leadership that can guide them through uncertainty and adversity.
  4. Diversify your revenue streams

“Don’t put all your eggs in one basket”. If you have multiple revenue streams, you can offset any losses in one area with gains in another.

  1. Think of expanding your current offerings: It could be as simple as partnering up with a business that compliments yours.
  2. Think geographically: If your business currently exists in only one location, look for opportunities in a newer market. That being said, conduct thorough research. You don’t want to find yourself in uncharted territory with no armor.
  3. Look at your demographic: If your business caters only to a certain demographic, think of ways to appeal to a broader audience.

Impact of a recession on a small business

Small businesses are more severely impacted by recessions due to their limited financial resources and shorter cash runway compared to larger organizations.

  1. Reduced Cash flow - As sales reduce and the profit margins become tighter, small businesses often find themselves with a reduced cash flow. Operating costs could also increase, further exacerbating the problem.
  2. Marketing takes a hit - The cost of marketing materials increases as the demand for advertising space goes down. This is mainly due to media houses covering up for the lost revenue. One way for small businesses to cope with the impact of a recession is by leveraging the opportunity to focus on organic growth through social media.
  3. Drop in demand - For small and medium-sized enterprises that rely heavily on a small number of large customers, losing just one could have a devastating impact on the business. Therefore, it is crucial to plan ahead and diversify either the audience or the product offerings.
  4. Decreased access to capital - Because of a recession, investors and lenders become more cautious, making it harder for SMEs to acquire capital. This becomes challenging if you are looking to get funded.

Preparing for a downturn in the market can seem daunting, but it doesn't have to be. With the right mindset and strategies in place, you can navigate through the tough times and come out even stronger on the other side. It's important to remember that recessions are a natural part of the economic cycle, and they don't last forever.

In the end, the most important thing is to stay adaptable and keep moving forward. A dip in the market can be challenging, but it's also a chance to reevaluate your strategies and come out even stronger. By following these tips and staying focused on your goals, you can navigate through any downturn with confidence and come out ahead in the end.