Expecting the Unexpected: Preparing for Economic Downturn During a Stable Economy

By Alex Viva, Director, International Business Team

In early 2019, the US economy had been growing for ten years following the “Great Recession.” Talk of a downturn was thin, though many economists warned of the cyclical and sometimes fragile nature of the economy. Only one year later, the entire planet was thrown into chaos with Covid-19 and resulting consequences. Although it has been five years since that somewhat peaceful time pre-Covid, it seems like “a long, long time ago in a galaxy far, far away.” Yet, some things haven’t changed as talk of recessions continue to come and go. It’s only a matter of time before those talks come around again.

Are we in a new normal? I think so. Are there still lessons that can be learned from that pre-Covid time long, long ago? Certainly. Let’s take a look back to help us plan forward.

A few years back, a captain for a major airline told me, “You’re most vulnerable when you’re flying fat, dumb, and happy in bright blue skies.” He goes on to say, “The seatbelt sign is off, flight attendants are serving, and people are moving about the cabin enjoying the flight, and suddenly you hit clear air turbulence.”

This analogy parallels what we may be experiencing in today’s economy. Businesses are doing well, we are at full employment, and spending is increasingly rebounding from one of the longest growth periods in recent history. Are we, in the pilot’s terms, flying fat, dumb, and happy?

Business is good and it looks like clear skies ahead. But although we may not see it yet, there is always turbulence ahead: Who could have predicted Covid-19? Supply chains interrupted, inflation, military conflicts, disease, and just plain uncertainty. Business, like many other things, experiences cycles. We have seen it time and again.

How will you prepare your business to survive in the long run?

Above, you will see the timelines of recessions in the US economy since 1970 from the National Bureau on Economic Research; the periods of economic downturn–or recessions–tend to be shorter than the periods of economic upswing, but recessions do hit and they will come.

Some last longer than others. The 2008-09 downturn lasted eighteen months; while, the Covid-related downturn in 2020 lasted only a couple of months. Just like air turbulence, the ride can become bumpy very quickly, which becomes very stressful, even if it is for a short period of time.

We all hope the next recession will not be as long and difficult as the one that troughed in June of 2009, but we can never be certain. Still, even if recession periods tend to be shorter, that does not mean they can’t be harsh, as we have recently experienced. It takes time to recover from a trough.

Are you prepared for the next cycle? Or are you flying fat, dumb, and happy?

Pilots have a plan when they run into turbulence; do you have one for your business in anticipation of a recessionary period?

Optimize these areas to prepare your business for economic downturn:

Capital: Many businesses struggle or even go out of business during a recession. Research shows us it is mostly due to running out of capital. Consider increasing your line of credit and establish new credit even if you don’t need it now. You may later.

Cash Flow: Increasing your company’s cash flow, critical in a downturn, can be made through a change in credit terms from your vendors and to your customers. For example, if your industry average is to pay suppliers in 45 days and you pay in 30 days, you are leaving money on the table. Conversely, better billing and collection practices as well as not being overly generous with terms will reduce your need to finance cash.

Suppliers: Determine if your suppliers are giving you their best deals. The laws of supply and demand may make it difficult to renegotiate during good times, but preparing for a recession and showing your critical suppliers that you are in this together may offer some long-term positives for both of you as well as short-term positives to your cash flow (see above).

Expanding Markets: Consider entering new markets domestically or exporting to foreign markets. Spreading your markets into new regions will help soften the blow from your current market coverage. Recessions are like hurricanes: although they have a wide-ranging effect, not all regions are affected in the same way–as we know very well here in North Carolina. During the trough in 2009, for example, China’s economy grew around 6.7% (according to tradingeconomics.com). Australia, India, Poland, and Brazil also experienced growth, albeit at lower levels. Much of sub-Saharan Africa avoided the recession as well.

New Channel Strategy: Consider alliances, partnerships, mergers, or acquisitions, or even franchising your product. Alliances and partnerships might be a less capital-intensive way of growing the company without having to make an investment in new production facilities or inventory, thus conserving capital critical in a downturn.

Employee Retention: Training in new skills, developing leaders, and obtaining support of your valued employees offers a business a leg up on the competition amid economic downturn. It is important to know that when you have a strong team of motivated, flexibly skilled and engaged employees, they will be instrumental in survival and strength in a recession.

The best time to prepare is now.

Formulate and begin executing your plan when the skies are clear and your business is flying fat, dumb, and happy. Pilots have a plan when they hit turbulence–do you? The North Carolina SBTDC is here to help plan and prepare for the turbulence that, as time has shown, is imminent.