For most companies, the U.S. economy is both friend and foe. When it’s thriving, business also thrives. However, when the economy is in a downturn, companies suffer. According to an average estimate among economists, the U.S. has a 64% chance of falling into a recession in 2023. This means that it is crucial for companies to make themselves as recession-proof as possible before Sugar Honey Iced Tea hits the fan. Let’s explore further and see how companies can best prepare themselves for a recession.
Technically, a recession is a period of time in which the United States gross domestic product (GDP) declines for two consecutive quarters (6 months). However, there is a debate about whether this definition is accurate. While the economy met the technical requirements for a recession in 2022, the White House argued that job growth and increased foreign business investments meant that a recession was not occurring.
Regardless of whether or not the definition of a recession was met, the effects were widespread, causing businesses to lose money, incur more debt, and lay off employees.
But, all of that can be mitigated by making your business recession-proof.
A business that is recession-proof accrues a steady stream of revenue independent of the economic conditions surrounding it.
Traditionally, what makes a company recession-proof is a strong inelasticity of demand, meaning that even when economic conditions are poor, the demand for a product or service remains consistent. An example of a business with a high inelasticity of demand is one that offers utility services. These companies generally fare well during recessions because they are needed by consumers regardless of the economic conditions.
One necessity for any business looking to become recession-proof is the ability to pivot. Here is what Marketwake’s VP of Strategic Growth, Hillary Settle, had to say about the importance of pivoting:
“As a business, you need to understand how and when to pivot, and you need to learn how to pivot quickly. You need to be able to look at your business holistically and ask yourself what’s working. Then, how do we pivot our efforts to be hyper-focused on what’s working so that we are not losing clients?”
Hillary goes on to say that businesses must also ask themselves “What value are we bringing to our clients?” and “Where can we pivot our spending?” Once businesses answer these questions, they will be able to retain more clients rather than seek new ones, bringing them one step closer to being recession-proof.
CEO of Bluevine, Eyal Lifshitz, says that having flexible working capital (liquid money) to fall back on gives clients time to collect their money slowly and pay receivables at a rate that is much more manageable in a weakening economy. In short, think ahead about private financing or other ways to gather capital before a recession hits.
Look at cash flow future forecasts to see when money is tighter during the year. Prepare to have a safety net of liquid money that your company can fall back on, and cut unnecessary expenses by ending workplace operations that may not be essential.
Within that, evaluate client spending habits as recessions approach and when they are in effect. During a recession, clients may pay slower because they are affected by the same economic conditions as your business. While you should be lenient with these clients, be sure to stay on top of payment terms to ensure that all financial obligations are met. If these obligations aren’t being met, even with the safety net you’ve provided, it may be time to renegotiate terms.
This comes down to asking yourself what is necessary at the moment. Is brand-new equipment needed for the job? Is it time to hire more employees? Do you need to move to a bigger and better office? These investments can be great in times of prosperity, but with increased interest rates during a recession, they could be an unneeded extra expense.
Most importantly, become a necessity for those clients that you already have.
As we’ve already discussed, it is much more expensive to acquire new clients than to retain the clients you already have. By making your business a necessity, clients will have no other choice but to keep you on during a recession. If they do stop using your services, it will be a significant loss for them.
However, it would be impossible for any client to make your business a necessity if they have never heard of you before. The solution? Marketing.
Marketing? Didn’t you just say to cut unnecessary expenses and get rid of unneeded services?
Here’s the math: The cost of paying four full-time employees with an average salary of $68,000 within an internal marketing department is $22,800 per month.
Here’s what you can get at Marketwake for that same price per month: a team of 14 marketing experts who promise growth by offering an endless supply of creative services.
The price is unbeatable. With a marketing agency, you can steadily increase revenue during a recession without layoffs and budget slashing. Here again is Marketwake’s VP of Strategic Growth, Hillary Settle, to talk a little more about the importance of marketing during a recession:
Although the cost-benefit analysis can be difficult to fathom, working with agencies like Marketwake ensures an increase in website traffic, engagement, and overall revenue for your business. Don’t believe us? See how we have helped a ton of other businesses improve their online presence. Interested in learning more? Contact us!
Nothing can really be considered completely recession-proof. However, industries that provide healthcare and essential goods (such as food and household items) typically perform well during an economic downturn.
Some examples of recession-proof businesses include:
What makes a company recession-proof has to do with whether the demand for its product or service is inelastic. Because their demand remains consistent, these companies have a steady stream of revenue independent of economic conditions.
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