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How to prepare your operations for a recession - your guide to surviving and thriving

June 28, 2022

How to prepare your operations for a recession - your guide to surviving and thriving

Synopsis
5 Minute Read

Headlines are being dominated by talks of a recession. Find out what you can do to prepare your business for any challenges ahead.

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 a potential economic slowdown from a competitive and confident position.

The longer you have to plan ahead, the better prepared you will ultimately be. This article outlines the key factors and steps to consider so you can successfully address challenges and seize opportunities.

Focus your time on major priorities

As soon as possible, make time to revisit your business models and any assumptions you have made about the economy. Set aside at least a half-day with your top decision-makers to scenario plan how a recession could negatively impact your business. Areas you’ll want to study include your gross margins, net margins, sales, various channels, and markets you operate in — as well as risk in your customer base.

A six to seven percent inflation rate will erode earnings regardless of your performance over the last year. Take, for example, a healthy and profitable company that generates a 10-percent earnings before interest, taxes, depreciation, and amortization (EBITDA) — or an average of $3 million of profit on $30 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 is impacting everyone and everything — influenced in large part by soaring fuel prices, surging demand, and geopolitical uncertainty. As China reopens from COVID lockdowns, rising industrial demand will likely put even more pressure on supply, demand, 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 there will be a delay between any change you make today and its eventual impact. The longer your cycle times, the faster you need to react.

Finally, dedicate time to thinking about the labour shortage in Canada. The country’s aging population and accelerated retirements through the pandemic have caught many organizations unprepared for the staffing challenges. How could this impact your organization?

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 people. More than a stopgap, strategic pivots to automation can help organizations to improve their productivity and significantly reduce their dependence on access to labour.

Prioritize high-margin products and services

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

Focus on products and services that provide you with 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 or if you go to market with these products / services at all.

A rationalization exercise will ensure you’re being strategic and maximizing your margins. Start with products and services that contribute less than 20 percent of your overall revenues. Is it worth placing large orders or having a large inventory when consumer spending drops?

The pandemic has moved businesses from a “just-in-time" model to a “just-in-case" model. This could create greater risk in a market slowdown and leads to cost conversions — or how long it takes to turn your inventory to cash. You might consider shelving items that take longer to sell and focusing on those that bring cash in quicker. A supply chain evaluation can help you identify opportunities to shorten lead and “procure to sale” cycle times, which will improve your ability to convert cash quickly, carry less inventory, maximize margins, and ultimately minimize risk.

Cash flow planning will be critical moving forward. Organizations with cash can pay off more debt as interest rates climb. You might also consider paying off your highest interest rate loans now before rates increase again.

Some blue skies

There are opportunities to be found during times of recession. Namely, a prepared business may find itself in a position to capture market share and grow through consolidation. You can also enjoy competitive advantages if you can predict what products / services will take off, focus on higher margins, and improve cash conversion.

As businesses emerge from recessions or periods of economic uncertainty, there are often opportunities for those seeking to grow through acquisitions and those looking to exit. Those 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, knowing other firms may be looking to acquire, this is a good time for those considering an exit to conduct a readiness study. The assessment will identify and inform a stepwise plan to eliminate any value inhibitors prior to putting the business on the market. You’ve worked hard to build your business. This or a similarly structured process will help you “stage it for sale” and maximize the return on your investment.

Inventory Management Health Check

Take our Inventory Management Health Check to see how your organization measures up against industry best practices.

Be self-aware

Many businesses have enjoyed great returns over the past several years and are managing their entire business based on their current financials and what's in the bank account. They're not looking ahead and scenario planning — 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 continue to grow. Engage in an enterprise-wide organizational review with an independent performance improvement team. They can provide unbiased insights into which products and services provide the best returns, where your prices could and should be, and where your opportunities lie.

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

Conclusion

  • Take time to plan; this includes:
    • Reviewing your business models with senior staff
    • Assessing your priorities, risks, and impacts on your business
    • Incorporating inflation into your pricing models
    • Paying down debt
  • Have a rainy-day fund to ensure your business has enough cash to ride out a recession.
  • Focus on returns: Look at your inventory, cash conversion, margin, and overhead and be prepared to let go of burdensome products / services. If you haven’t already, switch from a just-in-time to a just-in-case approach to inventory.

Finally, always look ahead. Many businesses have had their best financial years recently, but world economies are still volatile. A business that anticipates and gauges challenges is more likely to overcome them — and outperform their competitors.

Contact us

For more information, contact Yohaan Thommy, National Performance Improvement Lead.

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