Thriving on Recession

By Riaan Steenberg

Can your business survive a recession? It is easy to forget that recessions have been happening since the beginning of time and that there are well-proven strategies and tactics to get the most out of business during these times. The more challenging question is to ask how we can respond to them in the new world and if there are new strategies for responding to tough times.

Most people cannot remember the recessions of the 1980's and cannot think of a time in which international trade nearly happened at a snail's pace. What if the dollar just becomes too strong and your local currency goes beyond making a lot of what seems like commodities now and turns them into luxury goods?

We have seen failures and major value adjustments in banking institutions, slow down of real estate development and a massive turn towards a buyers market, strong decline in technology sales and further drops in sales and skyrocketing costs in many industries. Many commodity stocks are failing and economies are becoming more service based and less focused on own production. These are lead indicators of a deeper recession that is about to follow.

A recent report warned that corporate debt is at all time highs which further indicates that we will not be able to spend ourselves out of a recession. These continuous market corrects in real estate, banking, insurance, property, comparative values of cash, bonds and commodities is a reflection of the movement of cash from one asset class to the next to exploit ever dwindling returns and to support artificial market activities to create value.

The rising interest rate cycle together with a more marked approach to quantitative easing spells out a time that will see some predictable cycles of change. We will see governments trying to play with fiscal policy and creation of programmes that are aimed at creating employment, both of which has proven to have limited success in a recessionary time. Business credit is likely to dry up or become very expensive when on offer, increased foreign competition, increased inflation and unemployment rates, reduced capital formation and a massive pull back of consumer spending.

Companies can only be tougher and leaner during these times. Organisations that are able to harness their financial, personnel and market resources and cut out bureaucratic and unproductive policies can convert the disadvantage to an advantage.

The primary goal of business during a recession is to optimise its cash reserves. The amount of cash available for discretionary use must be increased beyond normal operating levels.

As competition increases and a lack of demand, due to price pressure drives sales downwards, it means that less cash comes in through the front door. At the same time prices keep rising and labour and material costs rise. With rising interest rates there is a bigger requirement to service debt from a smaller cash pool.

Paradoxically, when you do not have a lot of cash — you need it and while it is tempting to think you can achieve higher cash levels only through cost cutting — in reality you have to realise that you will still require an operation to convert value for customers into cash. When you do not have cash, would you sell assets, knowing you need those very assets to generate cash? That is the hard question any business owner is faced with when the bank is knocking for the loans to be paid back.

Conventional wisdom holds that there are seven primary ways to increase cash for a business:

1. Reduce overheads

2. Increase sales

3. Increase prices

4. Sell assets

5. Downsize operations

6. Outsource non core functions at a discount to current operating levels

7. Refinance debt

These are tried and tested methods and most managers will be able to generate a number of savings, sales increase strategies, asset transformation or push hard for a larger increase to more customers.

What if we look for alternative strategies? Below are more than twenty approaches to recessions, which will assist you to think differently around the options for survival and to prosper.

1. Enter the discount and mass based market. What most businesses do is to try for higher paying customers. Smart businesses work on offering mass based products at lower margins and leveraging the benefit of economies of scale. Lots of little bits of money, is still a lot of money, especially when no one else is selling. Low cost, no-name, no frills, reduction of product lines, value bundles and a million other strategies can be employed to address the needs of a more thrifty market during a recessionary time. You can even buy high value brands, at a discount and bring them to the discount market at lower margins. During recessions, brands are of less importance, as they keep on disappearing. If you are concerned around brand image — launch a discount brand and see which one makes more money.

2. Cherry pick assets that are discounted in a recessionary market and purchase at a discount to consolidate market share. You may not even have to purchase businesses during recession as the "good will" inherent in their valuations will most likely be of little value when the rules have changed and often you can just offer the existing employees that you wish to acquire, a job and they may migrate with clients without the competitor being able to defend themselves.

3. Risk adjusted debt may be cheap to buy and if you have good collection methods and a good pricing model for debt, there will be plenty of it to collect. Mezzanine financiers also do very well during recessions as they pick up large shares in companies for discounted asset values. For example, you can buy 30% of a company by financing their cash flow requirements for a year, while usually this would have been offered as a simple loan at e.g. 10%. When you have cash in a recession, you can use it to acquire cheaper assets and do well in doing so.

4. Focus on attracting strong foreign investors and exploit local cost advantages with foreign enablement through technology and knowledge. One example would be retail portfolios in property that can offer market entry at relatively low dollar prices in premium locations, due to failing local retailers. The failing local retailers can leverage footprints and leases to build strong international partnerships while looking for partners that have local production capacity to lower costs. This opens up an opportunity in industrial property, which can leverage government incentives to support local economic development.

5. Look at sunk costs and package these as assets for sale. You may have invested in a technology solution and can now offer this as a privately branded solution for clients. Remember that in a recession your clients can benefit from smaller solutions that serve their needs while not having had to undergo the investment. By repackaging your sunk costs into saleable assets you are finding revenue where none existed before.

6. Determine which functions that are cost centres can be transformed into profit centres. Anything that you cannot make profit from must be considered as possibly non-essential and you must find ways to either do it with staff that are making your money or outsourcing it at a significant lower cost.

7. Turn compliance and maintenance requirements into revenue. Companies that focus on creating maintenance options and stretching the value for existing owners through the application of new maintenance strategies and enhancing existing offerings do well during recessions. Legislation also takes some time to catch up to the new realities of a recession and compliance becomes good business in which you can achieve some economies of scale over time.

8. Invest in sin stocks. The basic economic theory is that certain goods get bought when times are good or times are bad. Investing in human nature may not always be socially responsible but it becomes a way to keep the lights on. People keep on smoking, gambling and these behaviours increase when people that they feel under pressure. Candy sellers, tattoo artists and barbers still do business and sometimes do even more business during recessions.

9. When it is too hard to buy and sell, it may be possible to rent it out. This is a great opportunity for discount renters of all sorts to come to the fore. Your stock of capital goods could be turned into a working rental pool. Why not rent out suits to job-seekers, or cars on a daily basis at a very low rate? Your boardroom may be a great meeting place for others and your office chairs may work for the local church (with a drop-off and pick-up charge). The company can rent out the company cars to staff. If you can balance the risk with the opportunity, there are great renting business models that work well during recessionary times and because assets are scarce, it only makes it more value for people that do not have it.

10. It may sound bad, but people still die and have funerals, they still pay tax, still go to school, still have to live somewhere and they still have to eat regularly and health remains a priority for most people. It is good in recessionary times to be in businesses that speak to basic human needs. If you are in those businesses your task is to fulfil those needs and maybe there is a little less focus on outward innovation, while there is a lot of focus in the background on offering the basics at an affordable price.

11. Diversify with export led growth. During recessions the normal dynamics of price remain the same but it may be better for you to move to markets that are doing worse than you currently, and leverage the fact that you have knowledge and expertise to expand to areas in which it is relatively cheap but would have been more crowded or more expensive otherwise. The key is still to offer high volume, low margin products but you can gain an entry into these markets and possibly even move your production capabilities to new locations where they are cheaper. Trading knowledge for presence is a time honoured investment strategy during recessionary times.

12. Realise that not everyone is poor. There are still products that can be targeted at a rich niche — just because most are poor, there are still some that are rich. This is just a smaller pool and luxury goods have to be of exceptional value.

13. Invest in sales team. The balance between sales teams and production teams must shift heavily towards sales during a recessionary time. Why? There are less likely customers, it will take longer to convince them and production is only relevant if there are sales. Good sales teams and good sales team management is absolutely critical during a recession. It also still pays to market and you may even get higher returns than your competitors that cannot afford to market.

14. Unfix your fixed cost. Fixed costs are what kill a business. By making costs variable through contract negotiations with employees, vendors and suppliers you can often deliver the same or better coverage on a contractual basis rather than on a fixed cost basis. Contracting core staff will be a lot cheaper than employing them because you eliminate overhead and also consume the service on an as needed basis. Even for costs that should remain fixed, larger portions of compensation of management and teams should move towards variable compensation based on performance. During recessions it is often a good time to build employee share option plans where employee compensation is linked to the performance of the business and promotes loyalty and a sense of ownership. Self insurance is another way to look at fixed cost vs variable costs when times are tough.

15. It may pay to pay your customers to stay. If you need to cover the fixed cost of an operation and your customer claims that they can get something at a better margin it may be possible to offer them deep discounts and even produce at zero margin to keep the lights on. Small advantages can then be exploited to keep your assets in production and to make margin profits, while focusing on finding new clients and new product areas. Some money is better than nothing and as long as we keep moving forward we will get better returns in the long run than the person that refuses business at low or no margins. You may be able to work on a margin share agreement with your supplier in which you give him stock at no margin and share in the margin when he sells it to the end customer.

16. Consider loan financing as a way to build a balance sheet. During a recession the one thing that people do not have is money. They may be able to use financing to build returns that fund your future pay-backs. Although you may not get all your money back, it may be a constructive strategy to sell using loans and then to manage the fall-out when customers default. As long as you have a good loan book management strategy — you may be able to build a strong asset base that benefits from a turnaround.

17. Consider compassionate pricing. When there are tough times the better question to ask is "how much can you pay" and to shape the services that you offer to the needs of the customer. During recessions price determination is often hard as more competitors chase after smaller pools of money. Rather take the cash and match it with what you deliver.

18. Build in-house capabilities for market focused action. You may have used external agencies for software, marketing and essential services that can be better deployed in-house at a lower cost. Talent is also cheaper as companies cut staff during this time — so you may be able to bring in real skills and expertise for growth in the short term.

19. Consider survival-selling tactics such as teaming up with your suppliers to offer larger end-to-end deals that can also be marketed at the same time. Why sell only the steak when you can sell the steak and the chips? If you and your supplier combine budgets you may be able to offer a better product in the market while bringing down costs on both sides. Consortium formation can be keep the business within a small circle of buyers and sellers and ensure maximal support of each other's businesses and keeping clients "in the family".

20. Involve staff in the solutions. By pulling in daily short meetings that give relevant information on cash flow, business coming out and where we are at — you can both inspire people to come up with new ideas and remove the negative rumour mill that can easily destroy your business. Some people may think this is likely to scare staff more, but human nature is to work yourself out of a crisis, especially if you feel that you are part of the family. If times are tough, people will work to get you out of the tough position according to their abilities. By sharing the burden you will create a more focused management culture and involvement by people that can affect the outcomes of the process. It will also create less stress on the top.

21. Tackle issues early on and make sure you ask for help. If things are tough and hard and do not seem to work out — socialise the issues with your bank, suppliers, customers, employees and even competitors. Look for ways to improve or get out of situations that does not make sense. You are going through a tough time and history shows that in tough times it works better to collaborate to get ahead. Growing losses and debts and stock piles are not going to go away — you need to find ways to work on enabling these and turning them into cash. Sell off your debt, cut your losses and clear the stock at cost so that you can use the cash to trade into a smaller but more effective situation. Tactically surviving a recession is about making the most of what you have and not to get stuck in losing what you hope to realise in the future.

22. Another strategy is to wait it out. Recessions have been relatively short in recent years and if you are in an industry that performs well during a recovery, it is important to scale back but maintain your capabilities so that you can be ready for the upswing. The challenge with this strategy that it is never clear when the horizon will clear and it is better to act to be more nimble when the markets are changing.

Conclusion

Recessions are tough and scary times in which businesses need to rethink their business models and basic ways of moving from cash to cash. It does not have to be a time in which we do nothing and in fact many big companies were started and grew when recessions were strong. Take the challenge and do not waste a good crisis.

There are many strategies and tactics that can prove useful the business that is prepared to keep an open mind and seek opportunities to optimise rather than to cringe and go lie down in a corner, waiting for it to be boom times.

About the author

Riaan Steenberg holds an MBA, is a certified Project Management Professional (PMP) and Six Sigma Master Black Belt. He is currently doing his PhD research on Innovation and Entrepreneurship. He is an action-learning expert and facilitates programmes aimed at embedding organisational change.

He writes extensively and lectures and speaks on request.

Riaan is part of the management team of Regenesys and as a Director has played a key role in the school internationalising and become one of the top business schools in South Africa. Riaan regularly lectures on innovation management, scenario planning, strategy, critical thinking, cognitive processes, leadership, financial management and management accounting, business process re-engineering and any other topics that require out of the box thinking or a critical understanding of complex business interactions.

Riaan has been a management consultant that completed more than 300 assignments, and a global manager and executive with more than 20 years experience in both local and international environments. He is constantly involved in complex financial modelling, large-scale change and transformations and delivery of complex projects.