Now part of the life of a company, leaders no longer ask themselves whether they will face a recession but rather how to prepare.
That it takes the form of a:
- Sectorial recession, when the activity depends on the evolution of interest rates, advanced technologies, etc.
- Global recession, which can be linked to unforeseeable events (health pandemics, smoke of a volcano) or probable events (wars, meteorology, etc.)
- Systemic crisis, where the previous market elements have become obsolete, normally caused by a major discovery and simultaneous implantation in terms of energy, infrastructure and communication
Here follows a list or as many tracks to not be surprised.
Have advanced indicators and forecasting and recession detection tools. Three types of indicators must be mobilized:
- Macro-economic: interest rate, exchange rate, price of materials
- Sectors: competitive intensity, demand evolution, health of the players, market evolution (strong growth, soft, decay)
- Company: order book, cost of components or materials
Realize an Activity Continuity Plan (ACP) via a stress test.
The viability of the business should be tested through downward simulations of the key elements of the business model (sales, cash flow, and costs).
Depending on the results, a ACP should be drafted that lists all concrete solutions to possible problems. For example, a 40% decrease in turnover can lead to an Employment Protection Plan (EPP), which must be prepared in advance.
Being diversified enough,do not put all your eggs in one basket.
The company must build product lines or cyclical activities to smooth the effects of a global, sectorial or company-specific recession.
Reduce its fixed cost structure, to “be the last to die”, through the following levers:
- Reduction of the fixed Wage Mass (WM) (1 to 3 year HR jobs to reduce it by 10 to 20%) and increase of the variable WM
- Supplier negotiation to move from a basic purchasing model to a subscription model adapted to the activity
Build a cash reserve, ideally one-year payroll.
The role of the CEO and the Financial Director is to maximise the available cash at any time via the payment of salaries and bonuses, customer collection, supplier negotiations, stock circulation, bank loans, etc.
Mobilize tax and social assistance in advance. The main helpers:
- Employment – In the case of certain types of hires or employees
- Research Tax Credit (RTC) – Financing R & D in the broad sense
- Public Investment Bank – Financing technological R & D
- Export Prospecting Insurance (i.e. COFACE) – Export
- FinancingEventual available state aids in case of major crises
Reinforce capitalization to increase the equity of the company. Two main solutions:
- Put in reserve rather than distribute a dividend
- Increase capital through current shareholders or via new shareholders (employees, business angels, proximity investment funds (FIP), investment funds with national or international scope, industrial sector, etc.)
Stay close to your customers to create a glue effect
It is absolutely essential to create inseparable links with the customer:
- Business links (recurrent and indispensable services and products)
- Personal connections (know how to appreciate your customers – life is too short to work in bad relationships, or you better change your client!)
Create a pyramid effect with suppliers and distributors.
The goal is to share the suffering of the potential recession, so that it is supported in part by your supply and distribution chain.
The review of contracts (variability, threshold effects, and deadlines) is crucial.
Create recurring products and services to generate stable sales.
Ideally, the turnover should be made through a medium-term subscription plan. Consumer or B2B contracts must be written accordingly.
It is true that with products that generate steady turnover over a 5-year horizon, we can easily see the recession…
Being in two market positions rather than one.
In 2008, the restaurants with a menu at 50€ suffered while those who had a 25€ menu developed their turnover.
It is wise to build two product lines, one with a lower position than the other. You will in fact reduce the fall in demand and volumes (principles of communicating vessels).
If you are mid-range, have the reflex low cost, with a brand or a different company.
Have a strong governance to stand back when the recession is there Board of Directors, Management Committee, Steering Committee and a coach will be your flagship in the fog of a recession.
Analyse what your market-changing trend will demand from now on and adapt your products or service accordingly. If a common American proverb used to say “no parking, no business” before, now it certainly will become “no e-commerce, no business” in many industries and especially in the retail one.
Being a leader, are you ready to face this major challenge? Have you already asked your clients and spoken to the rest of stakeholders?