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By Itamar GeroJuly 1, 2022In Business

Is your Business Ready for a Recession?

Over a decade of cheap money has yielded exciting and often dubious opportunities, from shoddy yet celebrated startups like Theranos, the crypto-coinage mambo jumbo and its derivatives, the infamous ICOs + join us at the ground floor NFTs, meme stocks and the booming retail investor(/gambler) scene, the backdoor of nonprofitable companies to unsuspecting public money (aka SPAC) and more…

It was a rave with no bouncers at the gate, and everyone’s invited; the funkier or dodgier you are, the better, smarmy often interchanged with genius, and the last one standing will pay the bill.

It was easy to make money online and offline, and almost anyone with some initiative was part of the party. It was high time to throw hard work, 9 to 5, paced growth out of the window in favor of quick fix, get rich quick, too good to be true? “Shut up and take my money!” culture.

Like watching a car crash in slow motion

Low to non-existent interest rates made everyone borrow more and look for ways to make their freshly borrowed money grow more money. Big market makers, VCs, traditional institutions, and even countries started taking risks in the form of speculative investments in unproven startups that crept into the stock exchange through treacherous SPAC backdoors.
The US government and other countries stimulated their economies with free money! the check’s in the mail! And that boosted the frenzy even further, everyone at home, ordering online, investing online, consuming content, clicking on ads.

And then inflation reared its ugly head

The US printed 2 trillion dollars out of thin air; was it necessary? Perhaps, did it increase the discretionary buying power of millions of antsy home-bound Americans instantly? Yes. Did it devalue the money already in circulation, naturally! Did it have a domino effect on international manufacturing and shipping backlogs and costs? Leading question your honor.
Shut up and take my stimulus money
Couple it with once in a lifetime (don’t jinx it!) pandemic, and one trick companies like Wix, Shopify, Robinhood, and Zoom soared on the stock exchange. Companies with hardly any moat besides the free marketing the pandemic provided all of a sudden were traded at valuations that are reserved for groundbreaking, inventive pharma, semiconductor, multi-patented, existing for decades in the market type of companies.
Companies over-hired, over-stocked, over-incentivized, over-marketed, not realizing that a peak is nearing; the mandate is to ride the wave, and extract every dollar from that juicy stimulus, freshly minted money.

What now?

Planning and readiness for each scenario are key, Bill Walsh, San Francisco’s 49ers’ legendary head coach and general manager was notorious for his preparedness for every scenario a game might throw at the team, knowing what to do at the highs as well as at the lows, took away any anxiety potential low points usually bring, just stick to the plan.

Not looking the other way can save sleepless nights at the cost of imagining the worse and drafting a plan, to hopefully never be executed.

Victory Loves Preparation

How to prepare for a possible business downturn?

Disclaimer: There are many ways to glide into an economic downturn, these are some of my insights.

3 Levels of Tightening the Belt:

  • Discretionary (start tightening)
    1. Marketing budgets – Anticipate less return on investment, worth winding down and investing in retaining current clientele.
    2. Upgrades – To software, to infrastructure, to the org structure – I know you planned to!
    3. Travel – Self-explanatory.
    4. Expansion – Acquisitions, new products or lines of business should be considered thrice.
    5. Freeze hire – It’s better to stop or slow the press, ask for overtime and see how things evolve vs hire and then people go.
  • Cautionary (when cashflow is reversing on you)
    1. Incentives – Conserve cash, you can agree to defer until the sea is calmer, hindsight is always 20/20.
    2. Bonuses – What’s a must and what can wait?
    3. Raises – Freeze, set a deadline to revisit, if profits return, possible to pay retroactively.
    4. Capex – New laptops, furniture, servers, cars, private jets, space ships – not right now – use to old ‘till it’s dust.
  • Radical (when sh*t hits the fan)
    1. Deep discounts – Cash flow is king.
    2. Eliminating inventories – this sale is on fire.
    3. Pay cuts – The inverse of “A rising tide lifts all boats.”
    4. Unpaid leaves – Taking one for the team.
    5. Layoffs – Cut an arm to save the body.
Tighten the belt

These are potential breaks you need to pull before flying off a cliff. The pain of pulling the break is temporary and often does not equate to the regret of not acting in time, remember, we’re talking about investors’ money, the team members’ jobs you could have saved, the clients you could have served if you survived, I know it might sound exagaraated but if there’s something that the 2020 pandemic should have taught us, is that, everything’s possible.

The cost of not making a decision in critial times is often higher than making the wrong decision, many decisions are reversible, the ability to conclude and move forward quick is key.

Dissect your OPEX

Pull at the last trailing twelve months, this will give you some volume of expenses to look at, from top expense to bottom, which ones can be reduced, optimized, or outsourced?

Asking for payment terms from vendors and service providers is useful done earlier rather than when everyone is asking for it.
A few weeks into the pandemic, when we sent over 200 employees to work from home, we quickly filed a petition for reduced rent because we knew that soon a barrage of requests would come to the landlord and we wanted to be top of mind, top of the pile (we were indeed granted that discount for six months of 2020, later on, we gave up half of the office space but it was a good chunk of savings)
Outsourcing shifts the balance of payroll, employee contracts, CAPEX, and more, into someone else’s hands, will they charge a premium for it? Certainly, but it allows you to not commit to 12 out of 12 months’ worth of expenditure, examples could be marketing, customer service, accounting, and more.

Analyze Revenue and Anticipate the Drop

What portion of revenue is at risk and why? Is there anything you can do to mitigate it, who are your largest clients? Buyers? Users? What is the likelihood of them tightening their belts and what’s the impact on you?
  1. Schedule periodical calls with top clients, users, and buyers – keep your finger on the pulse and ask candidly to be informed ahead of time of any planned drops in their spending with you.
  2. Set thresholds for when are you starting to cut on expenses from the lightest to the most severe (see tightening the best section)
  3. Have a concession plan to mitigate potential cancellations, discounts, deferred payments, and strategic partnerships.
What are you willing to do to retain that revenue, and if this revenue shrinks, can you replenish it?

Set thresholds for action

At what point of revenue or profit loss do you trigger your belt-tightening plans? For example, on a drop of 5% of revenue for two consecutive months, we will start chopping discretionary spending, mainly the marketing budget and we will freeze hiring.
The more structure and trigger-based your plan are, the more confident you will be when the plane starts what might seem like a nose dive in turbulent times. You got this, you prepped for this.
Are there opportunities in revenue loss? To refresh your product offering? To improve your processes and services? When things are flying high and the machine is cranking hard, there’s less time for retrospection and improvements; it shouldn’t be the case, but it often is.

In every adverse situation, there’s a chance to learn about how sturdy you and your business are, but more importantly, there are opportunities to emerge in a new better form.

Better safe than sorry
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