If you’re reading this and you run a company, then the last couple of weeks have been tough. But, in the same breath, it is also true that the best businesses really are built during times of crisis and recession. .
The question is how do you, attempt at least, to learn the lessons of previous downturns (however so caused) and ride this one out in a way that allows you the time, agility and confidence to make the most of the upside that follows?
Most firms suffer during a recession, primarily because demand (and revenue) fall and uncertainty about the future increases. But research shows that there are ways to mitigate the damage.
Let’s delve into the past and look at the 7 key points that helped businesses large and small survive the last one…
One: There are reasons to be positive
Studies that look back over the last four recessions suggest that less companies actually fair badly through them than you may think. Of the 4,700 looked at in one major deep dive 17% of businesses were either acquired, went bust or went to ground. Interestingly 9% flourished and grew revenues through the downturn. How? They saw the opportunity.
They weren’t protected from the market because they had better products or services. In fact, most of the resilient companies lost nearly as much revenue as industry peers during the recession.
They did it by making point two their number one priority.
Two: Quick decisions matter.
Speak to any seasoned founder or CEO to have steered a business through the last downturn in ‘08 and they will all tell you that times like these call for quick, decisive action. It is, according to most studies, also the reason most-cited for survival and fast growth in recovery.
Among the companies that stagnated in the aftermath of the Great Recession, “few made contingency plans or thought through alternative scenarios,” according to a Bain report on the banking crisis. “When the downturn hit, they switched to survival mode, making deep cuts and reacting defensively.” Many of the companies that merely limp through a recession are slower to recover and never really catch up.
They managed it by reducing operating costs earlier in the recession cycle, and more deeply. By the first quarter of 2008, the most successful companies had already cut operating costs 1% compared with the year before, even as their sector year-on-year costs were growing by a similar amount.
Their willingness to move early made them far more likely to successfully weather economic shock. As the effects of the downturn became more and more apparent, resilient companies focused on building more flexibility into their investment-planning and operations in addition to pursuing continued earnings expansion. By the time the economy was in full-on recession, they had reduced their debt by more than £1 for every £1 of total capital on their balance sheet.
Three: Survival (and a strong cash position) creates opportunity.
The story of Amazon gives you one of the clearest possible examples of the opportunities available post-crash.
In early 2000 the bookselling site sold almost $700m dollars of bonds to raise some money and ensure its finances were secure. In doing so they, unknowingly at the time, prepared themselves for the dotcom bubble that exploded just a month later. The result was that more than half of their competitors disappeared, leaving them with a clear path to global dominance.
It may seem obvious to say ‘don’t run out of money’ but surviving a downturn requires deft financial management. Companies with the highest amount of debt often need to cut deeper and faster in order to stay afloat, damaging their prospects of recovery when it comes.
Such deep cuts can also impact productivity and ability to fund new investments. Leverage effectively limits companies’ options, forcing their hand and leaving them little room to act opportunistically.
So, don’t rely on debt too much for short term gain. Instead manage your P&L and balance sheet carefully and you will prosper long term. ALWAYS allow yourself 6-12 months runway
Four: Don’t panic
Sharp downturns, particularly those like we are now experiencing, can send even the most experienced founders, or business leaders into a tailspin. But the key is not to panic.
There is a big difference between making fast, decisive decisions as a leader and panicking and we only have to look to the financial markets as a great example of this behaviour.
Right now, investors that weathered the last recession probably aren’t even looking at their holdings, as doing so can create an urge to panic sell. This means that they almost certainly miss out on the market rebound.
The same is true for business leaders. Decisions should be made on the logic that things are rarely as bad (or good) as they first appear and that any good business should go back to their P&L and reshape it based on the supposition that 50% of revenue may disappear for a period of time.
While that number may not be exact it is a great exercise in understanding your true financial position and what you may, or may not, need to do to your fixed cost base in the short term to maintain runway.
This kind of data provides a platform for logical decision making that can then also be communicated quickly and effectively, helping people understand the realities of the tough calls that may have to be made (more on that later).
Good leadership (more about that later) is about transparent, empathetic action. And data is your gold, your compass.
Five: Backed companies fare better
As we saw in the Amazon example, companies with cash reserves are usually the winners in times like these and studies have proved that those backed by private equity, such as our own portfolio businesses, emerge in better shape because capital is easier to access.
It’s part of the reason that private equity money continues to flow, at least once the initial shock of the downturn has worn off. Businesses that are not solely reliant on staying in business through revenue alone can continue innovating at speed, while those around them panic and cut costs.
This is particularly true at the start up end of the funnel as cash burn is usually low and runways are therefore 6-12 months+ irrespective of revenue. This very fact creates a (rare) investment opportunity for investors at a time when stock markets remain so volatile.
Couple this with the fact that EIS relief allows investors to claim back tax and you are investing into super agile, funded businesses that are able to pivot on a whim to the opportunities as they come and present themselves.
Six: Downturns last longer than you expect
Between October 2007 and March 2009, stocks plunged 57 percent, down a seemingly bottomless hole. Twelve years of gains disappeared in 17 months.
Then, just like now, economists were talking about ‘V Shaped’ recoveries but in reality, once a large economy runs out of steam it can take a long time for it to pick up speed again.
You should be preparing for this scenario, right now.
This means creating financial models that take account. Yes, absolutely create a plan to manage a rapid recovery but equally be ready to slog it out for the long haul.
Short term you can look at all kinds of measures to reduce variable costs as much as humanly possible, pause hiring and attempt to lower product costs to ensure your team is ready.
Alongside this it can really pay to create a guerrilla-style special projects group within the organisation to look specifically for the opportunities that will be created. Now more than ever is innovation and agility important.
But, alongside this view you also need one based on the 50% revenue cut scenario discussed earlier. If this happens what do you need to do to survive for the next 12 months+? Be ready to press that button at a moment’s notice based on the economic (and in this case pandemic) data readily at hand.
If Italy manages to lower daily cases in the short term and get on top of the virus outbreak there then it will provide the good news needed short term for markets, businesses and individuals to feel like there is light at the end of the tunnel.
If that doesn’t happen in April, then it is time to start considering your Plan B…
Last, but certainly not least, is leadership. Never is it more needed, or important, than in times like these. But what it looks like is actually different to what many believe.
Crisis management calls upon character and empathy – and lots of it. The temptation can be to overly positive, upbeat or confident in these moments but when people are focused on basic needs (food, shelter, paying for things) in the early phases of a crisis this can come across as being disingenuous and disconnected.
Instead, the focus should be on open, honest assessments of the situation, explaining that not all the answers are yet clear but that there is a plan to quickly and effectively find them and share with everyone. Waiting until those facts are available is dangerous as it creates a vacuum, which employees will fill with worst-case scenarios.
Great leaders also keep everyone up to date and mobilize teams by setting clear and simple priorities, empowering individuals and teams to help collectively solve the challenges and answer the questions as a group. It is the responsibility of the ‘boss’ to quickly establish the architecture for that decision making via empowerment and the creation of crisis action teams that can gather around specific challenges quickly and in an agile way.
In short, transparency and honesty are the number one trait and that should sit alongside clear empowerment and reorganisation to solve any problems quickly.
And above all remember; what seems like the end of the world right now will soon be looked back on as an opportunity for personal and professional growth. Uncomfortable as it may be right now hang in there…