CEO’s Lessons On Recession And Adapting To Volatile Market Condition-Shootih

CEO’s Lessons On Recession And Adapting To Volatile Market Condition

Key Highlights

  • The International Monetary Fund (IMF) has dropped a bomb recently by announcing that “The world may be teetering on the edge of a global recession”. 
  • Preparedness is undeniably the key strategy to conquer the upcoming recession like a champ. 
  • Identifying and eliminating unnecessary costs can be beneficial during a recession. 
  • Closely monitoring the cash flow can give you an accurate picture of your company’s finances. 
  • Diversifying your investment portfolio and adding recession-proof funds can help in sailing through volatile markets. 

According to economists and experts, a recession can be identified by an inverted yield curve, a situation where people pay more money for short-term borrowing, economic activities slow down, and layoffs and widespread unemployment reduce the purchasing power of consumers. 

The International Monetary Fund (IMF) has already dropped a bomb recently by announcing that “The world may be teetering on the edge of a global recession”. 

Now that we know that recession is almost inevitable, it is time to prepare instead of panicking. In this blog, I am going to talk at length about the recession and how businesses can adapt to volatile market conditions and accelerate their growth.

Past Recessions And How Companies Overcome Them

In their article “Roaring Out of Recession” published in the year 2010, Ranjay Gulati ( Professor of Business Administration at Harvard Business School), Nitin Nohria ( former dean of Harvard Business School), and Franz Wohlgezogen (doctoral student at Northwestern University’s Kellogg School of Management) studied 4700 public companies. They found that during the recession of the 1980s, 1990s, and 2000s, 17% of these 4700 organizations failed badly. They either went bankrupt, were acquired, or became private. The same study revealed that 9% of companies flourished within the next three years of the recession. 

The difference? Preparedness. 

This study and later studies, like the one conducted more recently by Bain, suggested that there were companies that enjoyed a steady growth of their income post-recession. The major reason they came out on the other side stronger was that they prepared themselves with contingency plans rather than making deeper cuts and becoming completely defensive. 

Recessions have happened in the past, but this time COVID-19 has accelerated it further. 

The traditional recession-proof businesses failed to maintain their status because of the restrictions imposed by the pandemic. Movie theaters, restaurants, personal care (affordable luxury), auto repair, etc., used to be referred to as recession-proof businesses but have suffered equally during the pandemic.

Even though the upcoming recession is going to be very different from all the recessions that happened in the past, preparedness is undeniably the key strategy to conquer the economic downturn like a champ. 

Lessons To Prepare For Recession And Adapt To Volatile Market Conditions

3 Lessons For Coping With Recession & Accelerating Growth-Shootih

Here are some lessons that worked for me and I hope they will help your business as well to weather the recession and come out stronger on the other side. 

Lesson 1: Cut Down Your Costs 

Now when I talk about cutting down costs, I neither recommend nor advocate the traditional ways of layoffs, downsizing, disinvesting, or borrowing. Rather, a better way of cutting costs would be having a closer look at your company’s finances, identifying the leaky buckets, and taking corrective measures. 

Every business has certain leaky buckets that need to be identified and rectified quickly. With the post-pandemic supply chain bottleneck, you need to re-evaluate the way you used to supply your products and services to your customers so far. 

Analyze which costs are unnecessary and can be cut without impacting profitability. Adopting automation can also effectively cut unnecessary labor in repetitive tasks and employ your workforce in much more strategic tasks. 

Digital technology not only helps companies to cut costs but also makes their operations more agile, enabling companies to react quickly, adapt to the changes & handle the uncertainty that comes with a recession.  

Lesson 2: Monitor Your Cash Flow 

Take time to sit and imagine the worst-case scenario in terms of your cash flow. Include all your expenses & taxes, remove aids and investments, and paint a picture of your business with little to no cash coming in for the next six months. Now get up from your chair, take a break and breathe. 

The picture you just painted is the worst-case scenario. Now it’s time to change the mindset and analyze how you can protect your business from falling into this scenario. For that, you will need to monitor your cash flow closely. Review each one of your expense areas, predict income & expenses, cut costs, build good supplier relationships, cancel non-important subscriptions, delay new purchases, take government funding, and most importantly, utilize any cash that might be sitting idle today in your bank accounts to invest in short-term funds and reap fair returns in the upcoming months.

Lesson 3: Diversify Your Portfolio And Build An Emergency Fund

The first and foremost rule of dealing with a recession is quite simple; do not run out of money. 

Invest money in debt securities to use during emergencies in the coming six months. Right before the dot-com burst, Amazon raised tons of money that served as a cushion when the market came crashing down. 

A smart business owner knows that the market never stays the same. If it is riding low it will also go up in the future. You just have to hang in there. When the downturn hits, businesses react by becoming extremely defensive and going into survival mode. They start selling their stocks way cheaper than they bought them, disinvesting, and making deeper cuts.

To prepare for the upcoming recession, you need to set up an emergency fund so that you can have easy access to cash in the coming quarters. You can set aside the business’ excess cash and invest it in short-term investment options like ultra-short-term or liquid mutual funds. This way, you can put your idle to work and gain fair returns and also use this fund during the recession to support your operations. 

Another great way to prepare for a recession is by diversifying your investment portfolio. Historically, certain investment options have failed miserably during recessions and some have been successful in supporting investors during tough economic times. 

Read our blog 3 Recession Proof Funds To Invest Your Business’s Idle Cash to know which mutual funds you can add to your investment portfolio to make it recession-proof. 

Wrapping Up

These are the three lessons I have learned as an entrepreneur that helped me through the various moods of the market. 

Your business’ success depends on how well you utilize your capital. Usually, the cash sitting idle in your bank accounts loses its value over time because of ever-growing inflation. Rather than letting it sit idle, you can invest it in various asset classes based on your financial goals and gain fair returns on it. 

Investing my business’ idle cash has helped me grow my business regardless of economic downturns by providing me with a safety cushion.  

As I have already mentioned, automation can help businesses to get through the present situation, especially automation in a company’s finances. To deal with an economic crisis of any sort, effective business wealth management is an absolute must! You can take advantage of technology to streamline your finances, accounting, and wealth management. Automation can help in reducing redundancies and scope of error. 

So if you haven’t given automation a fair consideration for managing your business finances yet, it’s time you finally do! 

And remember, recession and economic downturn are just a phase, markets eventually recover and things start looking better again. All you need to do is have the right mindset, proper planning, and perseverance to make your business grow and prosper. 

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