JUST THREE SHORT months ago, the idea that business owners would be struggling to navigate a recession in 2020 seemed far-fetched. Markets were at record highs, unemployment at record lows, and the prospects for independent pet businesses were bright as consumers were flush with cash and ready to spend on their beloved animal companions.
But that was before a virus that didn’t even have a name in January entered our lives and turned the world upside down.
Now, in place of seemingly never-ending growth, we are looking at a sharp, painful contraction this quarter. Day cares, boarding facilities and pet sitters took a hard hit with trips canceled and pet parents working from home. And while many pet stores enjoyed a spike in sales as shoppers rushed to stock up on essential goods, those strong sales couldn’t last. One person’s spending is another’s income. When the spending stops, those incomes fall. Economies contract. Businesses hurt.
The outlook now appears to be for everything to be opposite of what you may have expected as 2020 arrived. Sales will fall, interest rates rise, banks could cut off credit, supplies will become disrupted, and some of your trusted vendors may disappear.
For anyone who ran a business during the Great Recession, the memories are unlikely to be pleasant. In 2009 alone, more than 1 million companies filed for bankruptcy. Recessions are particularly tough on small businesses, though many indies continued to thrive thanks to the pet food recalls for melamine in 2007. And the survivors learned that downturns don’t last forever. They rarely persist past a year. If you can keep an eye on the long horizon, there are always better times ahead.
A natural response in the face of an economic slump is to “batten down the hatches,” focus solely on the problems in front of you and wait for things to turn around. But such inaction can often be the riskiest response. And it wastes the opportunities that emerge during disruption, like the chance to challenge old ways of doing things; take advantage of competitive opportunities, as independent brick-and-mortar stores did when Chewy began to experience delivery delays; and prepare for the changed marketplace that will emerge.
Advertisement
Indeed, it is often during recessions that the seeds for future success are sown. In a similar vein, the counter-cyclical nature of business success — the best times to advertise are when your rivals aren’t, the best time to ask for a loan is when you don’t need it, and the best time to hire is when the economy is weak — supports launching initiatives or change programs when the outlook is least rosy.
In the following pages, we offer tips for a rapid but measured approach that will put you in a position to take advantage of an economic slowdown. With agility, skill, courage and a little good luck, you will be able to emerge from this dark period stronger than ever and one day look back at 2020 as the start of your very own roaring twenties. We wish you the best.
01 Know where you stand / Be it a good or bad economic period, you should have a thorough understanding of where you stand in terms of your current financial numbers as well as projections for the future. Expenses obviously need to be scrutinized, and revenue flows should get priority. But it’s equally important to understand which areas of your business drive the most value, Tim Raiswell, VP of Gartner’s Finance, says. “In the middle of a recession, you may find yourself forced to cut costs in smaller windows of time like days or weeks, instead of months or quarters,” he writes on a company blog. This may lead to hasty errors, many of which can be avoided if you start preparing now.
02 Assess the risks / Among the first steps for a company to take in a challenging economic environment — especially one that could significantly worsen — is to assess in a systematic manner its own vulnerabilities. Consultancy Recession.com offers a free, 20-question “Recession Readiness Assessment” that allows you to see how your business is placed should a downturn happen. You can take it here:
petsplusmag.com/4201.
03 Keep tabs on your credit rating / A blemish on your credit rating can sometimes take years to correct and make borrowing much harder during an economic slump. With good personal credit, you’ll stand a much better chance of being able to borrow at good rates. This helps if you want to refinance when mortgage rates drop, which usually happens during economic downturns, or to take advantage of falling prices to finally own a space for your business. At the same time “review any personal guarantees on company debt and work actively to reduce them to zero,” say the Recession.com advisers.
04 Focus on growth / You can’t cut your way to growth. In a Harvard study of the small minority of companies that achieved double-digit growth in downturns, the authors found that yes, they pursued efficiencies, but the most important driver was revenue growth, which accounted for nearly 50 percent of their increased shareholder return — twice as large as the impact of cost reductions. “Downturns make growth more difficult in the short term, but they should not undermine the potential for long-term growth — unless leaders starve their companies of the necessary investment,” they write. Even during a downturn, the vast majority of working-age Americans will still have a job, buy things and require services. “No matter what the economic conditions may be, there are always opportunities to grow sales,” says Rick Leibowitz of the New York State Small Business Development Center. He advises to always be looking for new ways to provide existing customers with more products/services, and keep striving to get new customers.
05 Choose the correct legal framework / Be sure your business and its assets are protected. Becoming an LLC or S-Corp doesn’t automatically remove the risk. Keeping insufficient insurance can be a disaster, exposing your business to a range of legal issues. “Before you do anything else to recession-proof your business, focus on making sure your business is built on the best legal foundation possible. Consulting with a lawyer, accountant, adviser and trusted bank are essential in keeping your business assets secure and airtight,” writes digital consultant John Boitnott in Inc.
06 Have a playbook / “You need a playbook in the event a downturn happens, with some scenarios on how it might happen, and say, ‘OK, this is the script that we’re going to work off. We will modify it based on what really happens,’” Sven Smit, a McKinsey senior partner, told the McKinsey Podcast. In a set of guidelines (petsplusmag.com/4202) for businesses dealing with a downturn, PriceWaterhouseCoopers suggests posing these questions to yourself to understand the true impact of a slump based on how your customers and competitors might react.
- How will our customers behave? — Will they trade down to the cheapest product, purchase the same product less often, or seek a substitute product or service?
- How will our competitors react? — Will they change their product offerings, seek to maintain volumes by cutting prices or seek alliances to reduce competition?
- What do we need to do well to minimize the impact of the downturn on us? — Play to the strength of our existing customer base rather than seek to expand, focus on those customers most likely to thrive in difficult times, revisit our pricing policies, seize this opportunity to grow?
07 Ask, what’s the worst that can happen? / Feeling anxious? Add some ancient perspective. Seneca’s Letters from a Stoic is essentially a training manual for answering one question: What’s the worst that could happen? The self-help author Tim Ferriss calls this “negative visualization:” responding to anxiety, for example, not by trying to persuade oneself that all will be well, but by fleshing out, in detail, the worst-case scenario. This works partly because rendering fears specific makes them more manageable. But it also works by drawing attention to the fact that fearful thoughts about the future are just that: thoughts. Another lesson from the ancients: Worry only about what you can control.
08 Shorten planning cycles / If you normally meet every six or 12 months with advisers, meet quarterly. If your small, nimble business already meets with advisers quarterly, meet monthly. “Focused reporting and effective forecasting are critical to both effective planning and day-to-day management, particularly in a downturn,” notes the PWC guidelines. The consultancy recommends focusing on a limited number of KPIs. “These measures should be transparent, unambiguous and easily understood with a focus on cash generation.”
09 Have a shopping list / “History shows that the best deals are made in downturns,” write David Rhodes and Daniel Stelter, senior partners at Boston Consulting Group in their paper “Seize Advantage in a Downturn.” To capitalize on opportunities, they recommend closely monitoring the financial and operational health of other businesses. Liquidation sales of everything from equipment to inventory become more common. Great human resources also become more available. Develop a plan of action to utilize the cash you raised from selling junk inventory while you are still calm and objective.
Of course, keep in mind, you’re not doing this because it’s cheap, but because the asset is available. For potential hires, for example, make a habit of touching base with them quarterly and letting them know all the cool stuff you’re doing. So if they’ve lost their job, you will be their first call.
The same goes for staying in touch with banks. “When banks foreclose on your competitors and sell their assets for pennies on the dollar, unless you have relationships with banks, and you’re one of their first calls, the cheap assets will be sold to someone else,” says Recession.com’s Slain.
10 See problems as challenges, not threats / Shawn Achor, the Harvard professor-turned-consultant and author of The Happiness Advantage, did a study of bankers right after the 2007 crisis hit. He found most of them were incredibly stressed and their productivity slumped as a result. But a few were happy and resilient. What did those bankers have in common? They didn’t see problems — even industry collapse — as threats; they saw them as challenges to overcome. “What these positive outliers do is that when there are changes that occur in the economic landscape, they see those changes not as threats, but as challenges.” Such behavior can be taught and employees can be made to view stress as enhancing, a challenge instead of as a threat. Achor’s work with the bankers resulted in a 23 percent drop in their stress-related symptoms and produced a dramatic improvement in their levels of engagement at work as well.
Advertisement
11 Keep staff in the loop / A recession is hard on everyone, and while it can have a damaging impact on morale, you need your employees to be more productive than ever. The key thing here is to accompany any major change with an explanation of what makes it necessary and what effect it will have. This advice is rooted in psychological research: Human beings consistently react negatively to unexplained events. The effect is so strong that it is better to give an explanation they dislike than no explanation at all, provided the explanation is credible. When it comes to internal communications, your mantra should be “Simple, concrete and repetitive.” By the tenth time you say it, staff can only conclude you really mean it. Get employees involved in policy choices as well as tactics and implementation — asking, for example, how costs can be cut 15 percent without layoffs.
12 Think long term / Smit, the McKinsey executive, says the key thing to do when a complex, changing event like a downturn hits is to stay calibrated and keep an eye on the long term. “To date, there’s no recession — even the big ones — that has lasted longer than one or two years. So good times will come. In the recession, the response is, you go crazy. Cut, cut, cut. But don’t forget that the actions you take toward the future in the recession are as important as the actions you take to respond to the unique event that will take place. Holding that calibration is very difficult. Profit margins of companies are not that big. So in a recession, it will look very ugly very quickly. Ugly makes you respond with ugly, while the beauty is ahead, or the prosperity is ahead.”
Jim Muehlhausen, CPA and author of The 51 Fatal Business Errors and How to Avoid Them agrees: “Certainly don’t throw the Hail Mary. Rather than lamenting bad times and wasting time on activities aimed at making things better right now, focus on one year from now while everyone else is short-term focused. This is a terrific time to tune up systems.”
13 Hope for the best, plan for the worst / Sketch out at least three scenarios: a modest downturn, a more severe recession and a full-blown depression. Keep in mind that recessions hit different industries by different degrees. In the last two recessions, 2001 and 2008, pet industry sales held up well compared to many other industries, but it was also from a low base and it is no guarantee they will be as resilient this time. “Be sure to confront head on what you see as the worst case,” say Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen in their article, “Roaring Out of Recession” in the Harvard Business Review.
For example, what effect would a 20 percent decline in sales volume and a 5 percent decline in prices have on your overall financial performance? “You may be surprised to find out that, even in the case of a still-healthy company with operating margins (before interest and taxes) of around 10 percent, such a decline in volume and prices could turn current profits into huge losses and send cash flow deep into the red,” they write.
14 Prep your emergency brake / This refers to the additional expenses and the people you will have to cut when — should worst come to worst — you’re just about to go under water. “You want to have an emergency brake created in the cold, rational light of day and hope you will never have to use it,” Slain says. As a general rule, layoffs should be a last resort as productivity nearly always suffers when employees feel uncertain and unmotivated sackings and an uncertain future.
At the height of the Great Recession, 2.1 million Americans were laid off in 2009 alone. However, the companies that emerged from the crisis in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements, Gulati and his colleagues found in their study of public companies. That’s because layoffs aren’t just harmful to workers; they’re costly for companies, too. Hiring and training are expensive and a drain on management time.
15 Go for small wins / The organizational theorist Karl Weick showed in his classic article “Small Wins” in American Psychologist that when an obstacle is framed as too big, too complex or too difficult, people get overwhelmed and freeze in their tracks. Yet when the same challenge is broken down into less daunting components, people are confident and overcome it. As you lead your team through a stressful period, aim to give them a flurry of little things they can check off as they make their way through their work. It dramatically lowers people’s collective anxiety, enhances their collective energy and gives them confidence that the hard tasks, too, could be handled.
16 Manage inventory / One of the greatest hazards facing small businesses during a recession is being caught with extensive back stock that is sitting dead in the backroom. Now is the time to reassess your inventory management and tracking systems to find ways of reducing slow-moving goods. The truth is, if it’s not selling now, it will never sell in a recession. A leaner inventory will also give you greater flexibility when the economy slows, allowing you to respond to changes in the market quicker and with minimal loss of investment capital.
17 Don’t waste the opportunity for change / Substantial competitive opportunities await the leaders who can also keep one eye on their long-term transformation agenda. As economist Paul Romer once said, “A crisis is a terrible thing to waste.”
Advertisement
Downturns can shine a spotlight on the long-term health of a business, revealing vulnerabilities that might not have been as visible in good times. You should aim to use the downturn as an opportunity to create a sense of urgency within your business, to drive the large-scale change that will be necessary to succeed in the future. Keep in mind that an economic crisis often marks an inflection point: The world after it is unlikely to resemble the one before it. When you get a moment’s respite, you need to be thinking about how to remake your business to cope with the “new normal.”
“During recessions, cash isn’t king; innovation is king, says marketing expert Roy Williams, author of The Wizard of Ads, adding that the companies that adapt and shift resources the quickest will “crush” slower but more capitalized companies. “Trying new and different things is risky. But not nearly as risky as maintaining the status quo, crossing your fingers, and hoping that the economy will turn around,” he says.
18 Careful tax planning / It is important not to lose sight of the importance of careful tax planning while dealing with the management challenges presented by a downturn. While still ensuring that your organization remains fully tax compliant, it should be possible to improve your cash flow position by reducing or deferring tax payments. Opportunities here would include making maximum use of losses in calculating preliminary tax payments and ensuring that all available deductions are being claimed. At a more strategic level, falling asset values can also be taken advantage of for crystallizing losses and tax-effective succession planning.
19 Trust in something / Trust in something … be it God, your gut, destiny, life, karma, whatever. You need something to keep you going when times are tough and your brain is telling you: “This is nuts!” How? Just trust. Steve Jobs, who was no stranger to the lows of business life, claims this way of thinking was central to his success. “It has made all the difference in my life,” he said in his Stanford commencement address in 2005.
