What Difference Would a Recession Make to Your Business Plan?
There's more talk about a new recession these days, even though nobody feels like we have fully recovered from the last recession.
- Goldman Sachs apparently says the probability of another recession is 40%.
- The Economic Cycle Research Institute says we are now dipping into a recession.
- The renowned bond manager Bill Gross says that the global economy is at risk of recession.
What difference does the risk of recession make to your business plan? Here's a rough outline of what I tell my clients. (Feel free to call if you'd to be a client who gets more details.)
1) The risk of recession is not so high that it should be your base case for planning. It's hard to avoid the doom and gloom right now, but we tend to overemphasize the most recent news we've heard, and we tend to give too little credence to the tendency of economies to bounce back.
2) For each of your major action steps for the coming year, evaluate what difference the recession makes. For example, you may have two action steps associated with capital spending, one to add capacity at your mill, the other to install new software that will lower operating costs. Both are justified based on a moderate gain in sales. Now look at each through your recession lens. The capacity increase may not be needed in a recession. However, the cost-saving investment might very well make sense. Calculate savings at the lower production volume you would experience in a recession, and consider who tight working capital would be in a recession. You may find that some capital spending still makes sense even in a recession scenario.
Run this exercise for all major issues you have control over. Staffing levels, marketing plans, financial plans all need to be consisdered for both the normal levels and recession levels.
3) For action steps that will change if a recession does occur, develop a tracking system to monitor the best measure of your own sales. In some businesses, one tracking system may be adequate. However, if you are selling different products, in different regions, or through different channels, you may need several monitoring systems.
You may need to look through your customer to the ultimate user of your products or services. So if you are selling tray tables to Boeing, you need to think about the airlines around the world, not just Boeing's latest request for tray tables.
There is an example of an economic early warning system on the resources page for the best book about economics and business.
4) Use the data series in your economic tracking system to make check points. For example, you might decide that first quarters sales need to be $13.5 million, with total industry sales of $8.5 billion, for you to consider yourself on track. When first quarter data are in, if they don't match your check point value, then you shift to recession mode. Of course you don't need to set a rule that doesn't consider exceptions or extenuating circumstances. However, by setting up the rule ahead of time you will shorten your decision time if a downturn comes. Right now you have leisure to think of how you'll react to different scenarios. If we go into a recession, time will be in very short supply.
5) Consider the potential for higher-than-expected growth. It's hard to be optmistic, but in a recent blog post I sketched out how the economy might perform better than we think in 2012 and 2013.
It's easy to complain about the politicians and to worry about the prospects for a new recession. If you run a business or a division of a corporation, you're getting paid not to complain and worry, but to navigate through whatever conditions the economy gives you. Get started incorporating the possibility of a recession into your business plans. Call me if you'd like some help.
