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No one likes an economic downturn, but being prepared can soften the blow. The first step is knowing how to read the signs — not necessarily for the economy as a whole, but specifically for your business. Then you need a strategy for managing your production and sales, and workforce planning will be especially critical.
Fortunately, executives today have more options than ever for managing risk during uncertain times. Here’s how you can prepare yourself, your business and your team.
How will we know when a recession has begun?
The term “recession” doesn’t have a cut-and-dried definition. In its broadest sense, it means a pullback in the economy. Government agencies and many private organizations rely on the National Bureau of Economic Research (NBER), a not-for-profit research institute, to label recessions for official statistics. The NBER generally defines recessions as deep, sustained and widespread declines in economic activity, though it makes exceptions for short and particularly sharp downturns like the one at the start of the pandemic.
The main characteristic of a recession is a decline in demand for goods and services. Households, businesses and governments just aren’t buying as much stuff. As a result, companies may find that they need to cut costs in order to break even. They may also have to reduce their productive capacity, which can mean closing facilities, ordering fewer inputs and cutting payrolls.
In the macroeconomy, these effects add up to lower incomes for households and lower profits for businesses. So the sooner you can see a recession coming, the better. But the NBER only calls the timing of recessions months after they begin, and sometimes months after they’ve ended. Moreover, the label “recession” doesn’t change anything about the state of the economy.
The important thing for owners and managers is to decide what a recession means to you — what is a deep and sustained decline in your business, how can you prepare for it, how does your strategy change until it’s over and how do you seize opportunities after it ends?
What does a recession look like for your business?
The first signs of a recession for your business will probably be lower orders. A period of uncertainty almost always precedes a recession, and so your customers will be wary of buying more goods and services than they need. They’ll be less willing to sign long-term contracts and more likely to cancel existing orders.
On the flip side, you may find it easier to stock inputs. Your suppliers will start to see lower demand as well, so at first, they may be able to fill your orders faster and possibly even at lower prices. Once they reduce their own productive capacity, this situation will evaporate. So there might be a chance to build up inventories of inputs for the future at lower cost, as long as they aren’t perishable.
Workers will also react to the uncertainty. They may be less likely to quit their jobs, since new positions will be harder to find. Some may even try to perform at a higher level so that they’ll be more likely to keep their jobs during layoffs. They may also accept smaller or less frequent pay raises for the same reason.
Perhaps paradoxically, the period right before a recession might be your most profitable and productive in the entire business cycle — but don’t be fooled. You don’t want to end up with too many inputs or with big inventories of your own products when demand in your industry drops. Until the uncertainty clears, you’ll want to watch the signs intently and react with caution.
How to prepare for a recession
Traditionally, the most effective tools for dealing with economic uncertainty have been embedded in supply chains. Since the 1970s, “just-in-time” manufacturing has relied on supply chains that anticipate the need for inputs and ensure that inventories match demand on a daily basis. But these supply chains bring in the raw materials, intermediate goods, parts and energy that companies need for production; they don’t deliver workers.
That’s why workforce planning is so important. When companies face weaker demand, they may place workers on unpaid leave or let them go altogether. When the economy recovers and demand returns, the companies have to hope that they can refill the same positions. They’ll have to go through costly and time-consuming recruitment processes just when the labor market is starting to tighten.
In the meantime, the workers who are still employed have to pick up the slack. In government statistics, labor productivity usually spikes after recessions, when a smaller workforce is called upon to produce more goods and services. In practice, the extra pressure on workers can create tension with employers and is likely to reinforce the wave of unionization already sweeping through the economy. Overworked employees may simply quit as new opportunities open up in the labor market.
Some companies try to avoid this labor-market whiplash by holding onto their workers, even while demand for their products slows. At the moment, American corporations have near-record amounts of cash on hand, and keeping their workers could help to build loyalty for the long term. But executives at public companies who hold onto their workers might end up taking heat from investors who expect extremely disciplined spending, especially during a recession.
Another strategy is to force employees to work part-time. The number of workers who are on part-time hours for economic reasons — not by choice — generally shoots up during recessions. But again, these workers may leave their jobs if a full-time opportunity is available somewhere else. In an era of high gas prices, in-person workers may also choose to leave their jobs rather than commute the same distance for half the pay.
The advantage of flexible work
By contrast, businesses that use flexible work find themselves in a more advantageous position. These businesses fill out their workforces using online apps like Upwork, Toptal and Instawork, adapting in real-time to changing needs of staff. They usually have a core of permanent hires, and then they bring in extra workers for specific tasks, shifts or longer assignments without having to worry about carrying excess labor or making layoffs in the future. They can also keep rosters on their apps of the workers who have already received any necessary training and offer the best fit for their workplaces.
These apps are part of a transformation in the economy that is finally helping labor to catch up to the other just-in-time inputs of the production process. For example, most shifts for warehouse work on the Instawork app fill up within just 12 hours. Shifts in the service sector take slightly longer, but still less than 24 hours on average. Supervisors can decide in the evening how many workers they’ll need for the next day, and qualified people will arrive in the morning. There’s no need to call an agency or vet workers far in advance.
Flexible work also offers employers a chance to “try before you buy” by testing out relationships with a large number of workers before making permanent hires. When the economy starts to recover, these employers will be well poised to add to their payrolls. In fact, businesses were avidly hiring professionals they found on Instawork during the hot labor market in the first half of this year.
Recessions are moments of churn and change in the economy. For businesses that are well prepared, the opportunities are numerous. Taking advantage means keeping cash on the sidelines during booms, as well as thinking beyond the end of the recession and far into the next business cycle:
- Hiring. Businesses tend to lay off their part-time workers and least essential staff first. But when a business folds, its most critical full-time employees also lose their jobs. You may be able to bring in talent that was unavailable before, maybe even at lower wages. Workers who still have jobs may be available for less pay, too. You’ll need to have saved enough cash to increase your headcount, though.
- Inputs. Struggling suppliers will be eager for orders and especially for long-term contracts that will guarantee the survival of their businesses. If you have enough confidence in the sustainability of your own business to commit, you may be able to lock in low prices that will look even better during the next boom.
- Market share. When companies fold, their market share goes to their competitors. In industries with loyal customers, this can be a rare chance for businesses that react quickly and decisively with marketing and outreach. In industries where customers are more motivated by prices, you may be able to increase market share by undercutting your competitors, even if they all stay in business. They’ll have less cash on hand, so they’ll have a harder time matching your prices. And customers whose budgets are also under pressure will certainly appreciate your discounts.
- Acquisitions. Most companies would rather be acquired than shut down altogether. Recessions are usually the best time to buy complementary businesses or your own competitors. Looking for bargains can pay off handsomely when the economy recovers.
It can be hard to maintain the discipline of putting money aside for opportunities like these, especially when recessions seem to come along so rarely. Investors usually expect to see profits reinvested or distributed as dividends. But recessions do still happen, and when they do, a little bit of foresight and preparation can go a long way.