Who Will Survive and Who Will Fail? Part 1 of 3

There has been a lot of talk lately about the potential for a global recession in the near future from which North America would not be exempt. The conversation almost always focuses on the negative aspect this will have on businesses. As someone who has lived and worked through two significant recessions in Canada, one of these on a bank collection team dealing with the consequences of a recession, I have learnt a lot about who survives and who fails. Yes! There are businesses that survive recessions and some who even enjoy great success during them. So, what differentiates the survivors from the failures?

Lesson #1

Recessions quickly point out those who can really manage a business and those who have succeeded despite themselves. The counter intuitive truth is that businesses can still make money during a recession if the business has been positioned properly before the recession hits. It is very hard to reposition the business properly on the fly once the recession is actually taking place. In many ways the successful businesses are contrarians. During “normal” economic conditions, they are already positioning themselves as though they were in a recession looking for ways to make the business more efficient and looking for places where they can reduce costs while still being successful.

Lesson #2

Your attitude is the difference maker. The businesses that survived did not pay attention to the doom and gloom being disseminated by the various media sources. They did not pay attention to all the stories of businesses failing and believed that they were destined to the same fate but rather they told themselves that this was an opportunity because of the decreased competition. They recognised that they could take advantage of assets and inventory being sold at fire sale prices. In many ways, positioning themselves for the eventual turnaround. Attitude and perception are vital to success. Take unemployment rates for example, one could think “Wow, the unemployment rate is 7-10%” instead change your perception, think “Great, 90-93% of people are employed”, which is still a significant market as they still buy goods and services.

Lesson #3

Liquidity, liquidity, liquidity. Businesses that survived the recession were business that realised that cash is all important and focused as much on cash flow as profitability. They relied on cash rather than debt to operate their businesses. During a recession this becomes even more important, as if you rely heavily on debt, then in effect you are letting your financial institution determine your future. Most loans done by financial institution are done on a demand basis and since the institution’s primary responsibility is to their shareholders, they tend to become very conservative during recessions, especially if there is a negative outlook for a particular region and/or industry. There is a common saying in financial institutions which states that “your first loss is your least loss” which means even if they suspect any problems, even if your business is holding its own, they will act very quickly and could demand your loan. The moral of this story is to reduce your borrowing in times such as these to the bare minimum and focus on cash flow.

Fun Fact

many small businesses are started during recessions

and that these businesses have a higher survival rate than those

started during so called normal times

Lesson #4

It is important to know your customers and their buying habits and how they are likely to change during a recession. This will enable you to better manage your inventory and avoid overstocking items that will not sell. During a recession this becomes particularly important because often the first thought is that people will shop for the cheapest product they can find. However, past experience has shown that it is not unusual for buyers to move upscale rather than downscale, preferring to shop for quality items that will last longer. But the key fact is that they continue to buy just not as frequently. That’s not to say that some customers will not look for bargains. The key is to be clear where you want to fit.

Lesson #5

Be flexible and ready to take advantage of new opportunities that inherently arise during these times. However, before you chase them, always ask how will this effect my cash flow. These new opportunities may be products better suited to the new economic situation or opportunities to buy your competitors products or assets at bargain prices or many other opportunities that are there if you look closely enough.

Lesson #6

Look beyond what costs you can reduce. Also look at what costs you should as a minimum maintain and maybe even increase. For example, in a recession you are competing in a shrinking market and competition for what market share remains is fierce. Therefore, you have to work harder to stand out and by default that means you may have to spend more to make sure that you get your share or better of this shrinking market.

So, my message is this. Don’t fear the next recession, plan and prepare for it and be one of those who come out of it not only alive but stronger than ever. Most importantly do not get caught up in all the doom and gloom, believe in yourself, get liquid and you will come out of it not only alive but stronger than ever and well positioned to take advantage of the opportunities that will be open for you.

Remember, though many businesses failed, many more survived and not only survived but thrived.

For more information or to receive advice, please contact The Joyce Group Inc. at info@joycegrp.com or call (403) 818-1289