It doesn’t even really matter whether yours is a money milking venture or a startup. A recession tends to equally hurt every business. It’s such a time when you need to plan for alternative sources of revenue to remain in business while experiencing a precipitate decline in capital supply. During a downturn, capital is hardly available at any given valuation. To survive and sail through this period, one needs to take some strategic initiatives as discussed below:
Diversify Your Customer Base
It’s important to gauge in advance how a recession will impact your customer base. If you are in a cyclical business, you are most likely to experience a sharp decline in the number of customers to serve. Over-relying on a particular customer or industry for revenue is equally detrimental to the company’s future. Therefore, as a business owner, you should diversify your revenue base whenever possible.
Do Less with More
Think of being in a hibernation mode where you need to preserve energy to survive. Similarly, in recession, you need to cut down unnecessary cost to run a normal business operation and make the fund available for investment. Moreover, it’s a misconception that one needs to have adequate capital to run a big business. If a company like WhatsApp can manage to build a messaging empire with only 55 employees and 50 engineers, there is every possibility that you will also can.
Avoid “Growth at All Costs” Mentality
Having this type of attitude does worse than you can imagine. A lot of businesses have actually gone out of business because of either growing too quickly or putting growth as the gold standard to achieve. Priority should be given to achieving sound profitability over robust growth. Some percentage point decline in top -line (revenue) may prove sufficient to wipe out your entire bottom-line (net-profit). Having a contingency plan to generate even a marginal profit at times of falling revenues can make a major difference. Keeping growth in check can help the business lower down the cash burn rate as well.
Prudently Manage Liquidity Position (Cash & Cash Equivalents)
In a downturn, business owners need to focus more on cash sales and credit purchase to sufficiently arrange funds for working capital management. Put it another way, one needs to achieve overall less prolonged cash conversion cycle (payment to receipt) through turning inventory higher than that of in normal condition.
Grow Reserve for Rainy Day
This strategy is particularly applicable for an established business making a good profit. Apart from funding growth, a business owner should continue to accumulate reserve, i.e., retained earnings, as a rainy-day fund. In such circumstance, startups with good potential should approach investors for extending the payback period time.
Get to Know Your Potential Acquirers
When every option to keep the business up and running fails, it’s wise to sell it to strategic investors who essentially offer a better price for synergy gained in this acquisition. Such strategic buyers can be anyone, including your current customers. Developing a relationship is key here.
At times of recession, disciplined decision making is of utmost importance. The entrepreneur needs to plan his actions out with a balanced blend of cost-consciousness and risk-taking.