How to Recession-proof Your Business

A recession is defined as two consecutive quarters where gross domestic product is lower than the previous quarter. The problem is, you can be in a recession and not know it.

Nearly all of the jobs lost during the pandemic have been recovered, and B.C.’s unemployment rate remains at a low 5.3 per cent. But despite the buoyant labour market, the overall economic mood feels pessimistic. No business owner wants to hear the “R” word. But inflation remains stubborn, consumer confidence is low and, depending on whom you ask, the country could be talking itself into a recession. 

“It’s a self-fulfilling prophecy that can ultimately affect the economy,” says Steve Wellburn, partner, private enterprise at MNP. “Some businesses are more recession-proof than others, like tech and health care.”

“Recession-proof” refers to companies that are insulated from an economic downturn. With inflation hitting almost 40-year highs in Canada, many observers worry a recession is increasingly probable. 

While the future is not set in stone, businesses need to start planning to ensure they can navigate an economic slowdown from a competitive position. Here’s what your business can do to address challenges and seize opportunities.

Focus on major priorities

Make time to revisit your business model and any assumptions you have made about the economy. Set aside time with your top decision makers to plan how a recession could negatively impact your business. Study your gross margins, net margins, sales, supply chains and the markets you operate in — as well as any risk within your customer base.

A six- to seven-per-cent inflation rate will erode earnings regardless of your performance over last year. Take a healthy company that generates 10 per cent earnings before interest, taxes, depreciation and amortization. And say an average of $1 million profit on $10 million of revenue. With inflation at present levels, its entire profitability will be wiped out within 18 to 24 months.

With that in mind, the first step is to determine what’s driving your costs and margins. Inflation affects everyone and everything — influenced by soaring fuel prices, surging demand and geopolitical uncertainty. As China reopens from COVID lockdowns, rising demand will likely put even more pressure on supply and prices.

Think about how you might incorporate higher transportation and raw material costs into your pricing, especially given the dramatic shift for petroleum-based products. Are your models still relevant? Keep in mind that there’s a straight line between your predicted costs and your predicted profits.

Another factor to be mindful of is that there will be a delay between any change you make today and its eventual impact. The longer your cycle, the faster you need to react.

Finally, consider the growing labour shortage in Canada, particularly in the building trades. The country’s aging population and accelerated retirements through the pandemic have caught many organizations off guard for staffing challenges. How could this impact your business?

There isn’t a simple solution. It will require different strategies than you’ve used in the past, including leveraging AI and automation for roles that were typically held by humans. Strategic pivots to technology can help an organization improve its productivity and reduce its dependence on labour.

Prioritize high-margin products and services

Look for efficiencies in your business. That likely means climbing above the low-hanging fruit you might have harvested during the pandemic.

Focus on products and services that provide the best margins and be willing to compromise on those with high overhead and low returns. It may be time to rethink how to go to market with these products and services, if at all.

Start with products and services that contribute less than 20 per cent of your overall revenue. Is it worth placing big orders or sitting on a large inventory when consumer spending drops?

The pandemic has moved businesses from a “just-in-time” model to a “just-in-case” model. In a market slowdown, consider the notion of cost conversion: How long does it take to turn your inventory into cash? You might consider shelving items that take longer to sell and focus on those that bring cash in quicker. A supply-chain evaluation can help identify opportunities to shorten lead and “procure to sale” times, which will improve your ability to convert cash quickly, carry less inventory, maximize margins and ultimately minimize risk.

Cash-flow planning is critical. Businesses with cash can pay off more debt as interest rates climb. Consider paying off your highest-interest loans now before rates increase again.

Yes, there is light at the end of the tunnel

And it’s not an oncoming train! The good news, says Wellburn, is that there are opportunities to be found even during times of economic downturn. A prepared business may find itself in a position to capture market share and grow through consolidation. It can also enjoy competitive advantages if it can predict what products and services will take off, focus on higher margins and improve cash conversion. 

As businesses emerge from uncertainty, there are often opportunities both for those seeking to grow and those looking to exit. Businesses that are struggling because they couldn’t make changes, cut costs and manage cash flow may provide strategic merger opportunities at a discounted price.

Similarly, by knowing firms that may be looking to acquire, this is a good time for those considering an exit to conduct a readiness study. This assessment will identify and inform a plan to eliminate any potential red flags prior to putting the business on the market. You’ve worked hard to build your business; it may be time to reap the reward. The assessment will help you “stage it for sale,” much like a real-estate deal, and maximize the return on your investment.

Be self-aware

Many businesses — tech and health care to name two — have enjoyed great returns over the past several years and are managing their entire business based on their current financials. Theyʼre not looking ahead and considering scenarios — they’re not asking “What if … ?”

What if input costs soar? What if sales drop? What if key employees retire or quit?

You need to be proactive as concerns of a recession grow. Engage in an organization-wide review with an independent performance team. It can provide unbiased insights into which products and services provide the best returns, where your prices should be and where opportunities lie.

Remember, if inflation is expected to be six to seven per cent over the next two years, you’ll need to find the same per cent in cost or price improvements just to preserve the status quo.

So always look ahead. Many businesses have had their best financial years recently, but the economy is still volatile. A business that anticipates challenges is more likely to overcome them — and outperform competitors. Perhaps the single most important thing you can do is to stay resilient during harsh economic conditions. Staying resilient means keeping a close eye on finances, being willing to make changes to your business model and staying flexible when it comes to your products or services.