Inflation: Rising price levels leading to a reduction in purchasing power. One of the most significant contributors to a recession.
Due to COVID 19, many sectors of the economy are already in recession – airlines, hotels and hospitality, restaurants, cinemas, commercial real estate just to name several. Proposed higher income taxes and a shift to an aggressive global warming posture by the U.S. government (estimated at $2 trillion) will exacerbate the significant negative impact of the pandemic and could push the economy into ‘full’ recession.
Moreover, signs of higher inflation are everywhere:
- Increasing prices for food and home staples
- Significant jumps in residential real estate, precious metals, and cryptocurrencies
- Rising energy and gasoline prices
- Ever-surging healthcare costs
- and, the Biden Administration’s proposed third COVID recovery plan that could exceed $2 trillion
At this time: preparing for a recession makes sense
A recent study published by the Harvard Business Review found that 17% of all businesses didn’t survive the last recession, and of the ones that did survive, 80% were still struggling three years later. Only 9% of businesses exceeded expected financial results during the last recessionary period.
Managing In A Recession
Even in the best of times, businesses fail to fund and staff new opportunities. Managers have not learned that the trick to growing a business is not to increase expenses but shift funds – leaving the income statement untouched. Yet, many refuse to make even small changes to existing budgets. Most often, during a recession, decisions are based upon gut feelings and projected revenues and expenses are simply unsubstantiated numbers on an Excel spreadsheet.
Course of Action
- Businesses that not only survive but prosper during recessions play both offense (investing in growth opportunities) and defense (cutting costs and increasing efficiencies).
- They flatten their management structure, become more agile, and move to make their operations and processes disruptive-proof.
- They change their strategy and redeploy their resources to leverage their competitive advantage during the crisis.
For reallocation to happen – deallocation must occur
The Time To Prepare Is NOW
It’s no secret that most managers become attached to existing processes and budgets. They fear losing not just money, but people and focus. For example, businesses that focus on delivering premium products/services may have a harder time reallocating resources, fixating on adding value even in areas that might not matter to customers.
It usually takes a major event to get a business to change its strategy. A global pandemic, a recessive, a natural disaster, etc. In times of crisis, it is imperative that businesses maintain agility and flexibility and play the ‘offense/defense’ game.
- First, the business’s strategic plan must be redesigned to reflect a thoughtful reallocation and deallocation of resources.
- Second, the budgeting process must be reformed. With the strategic reallocation, new rules for deciding which projects to fund and how they will be measured needs to be determined. The budgeting process should be innovative. For example, it may be decided to scrap an annual budgeting process and move to a much shorter more flexible budget.
- Third, you cannot stubbornly continue in the same ‘pre-recession’ management mindset.
During a recession you must protect your business by going beyond superficial reforms. You must address the internal dynamics that affect how the business deploys resources. You must pull away from the emotional forces that prevent a willingness and readiness to respond to the crisis. Only then can you move forward.