As it currently stands, recessions are an inevitable result of the business cycle in our capitalist economy. So long as our modern economies and banking systems continue to operate as they do now, history has shown that every decade or so after a period of strong growth there will occur a period marked by negative real growth, declining output, depressed prices, and rising unemployment. While economists so far have been unable to come up with a system that can accurately predict when these cycles will occur, the fact that we can say with near certainty that they will occur means we should be taking every opportunity possible to prepare for these times of hardship. With proper preparation it is still possible to thrive during an economic downturn, and even use it as an economic opportunity.
Cash Reserves and Expenses
For many entrepreneurs and their businesses, recessions are a true test in fiscal responsibility. At my company, we have always been extremely conservative from a financial standpoint, as well as extremely responsible in ensuring that we have more than adequate cash reserves to be able to live through any recession. Nobody could have predicted that we would ever live through a difficult time period like the one we’ve gone through this past year, but that is why it is infinitely important to prepare for worst-case scenarios such as this. Conventional wisdom for personal finances says to “save it for a rainy day,” and the idea applies to businesses as well. Who knows when your cash flow might dry up, or banks might tighten up on lending? You need a healthy emergency fund to weather a downturn.
Sure, you can pour over the budget and find ways to cut expenses when times get lean, spotting the small indulgences that are eating away at profits without stimulating growth, but why wait until crunch time to know the difference between what is discretionary and what is essential? I have weekly meetings with my vice president of operations and vice president of finances in which I go through all of the payables for each hotel. I ask as many questions as possible and try to understand the necessity of each line. The fact of the matter is an expense that is deemed “necessary” one week may become unnecessary the next, which is why it’s so important to always have your eyes on them, even during times when the market is strong. For example, during one recent meeting I noticed we were paying for a membership to the chamber of commerce. We had passed through that line item many times before, but this time I posed the question: is this really necessary during the coronavirus pandemic? It’s not about affordability, it’s about identifying where pennies can add up to the dollars, which in turn can scale to huge savings that can make or break your business in times of distress.
Knowing What You Do Best
Although diversification can be a good thing, it is important to recognize that simply adding other products or services to your offerings isn’t necessarily diversification. It can often be translated to mean simply “different,” but at best it’s a waste of time and money and at worst it will damage your core business by taking that time and money away from what you do best. Rather than investing too heavily in areas that your business is inexperienced or unfamiliar with, take a good look and identify (if you haven’t already) your core competencies – the defining capabilities or advantages that distinguish you from your competition. These are what have allowed your business to flourish during times of plenty, and will also be what carries your business in times of distress.
It can be tempting as an entrepreneur to always be searching for the next big idea, boldly advancing into new territories to take your business to newer heights. However, experimentation can create vulnerability and take attention away from what you actually do best. Before you look for ways to grow, make sure your business model and strategy have your main strengths at their core. This will create a strong and stable foundation that will not only allow you to play with incremental change but also weather the inevitable economic shifts.
Take Advantage of Opportunities
By properly preparing for recessions, you can gain the ability to see them for what they are: opportune times. If you are a believer in taking a contrarian approach to investing, you can use these times to make some compelling business decisions. As important as fiscal responsibility, conservative spending and cash flow are to maintaining a business, true growth only happens when you take risk, and if you want to hit home runs versus singles and doubles, taking advantage of opportunities during a recession is the way to do it. It requires toughness, resilience and grit, because it’s psychologically challenging to remain committed to an investment in the face of overwhelmingly negative sentiment about the investment, and the general feeling of distrust in the market means you will have to work a lot harder to achieve things such as obtaining funding and support. It also requires creative thinking, market expertise, time devoted to conducting research, and the prioritization of long-term outlooks. However, long-term thinking is how you create long-term results, and for me my only long-term goal is that we as a company remain true to our values and principles. As a company we work to create an environment where we enjoy working with each other and have true fulfillment from many points of view. Looking at your business that way, you can build something that is able to survive and even thrive in the inevitable ebbs and flows of the business cycle for decades to come.