Ready for a Recession?
Remember the crash of 2008? If you were in the home improvement business, it would be difficult to forget. Phones simply stopped ringing. Wall Street dipped and plunged and big financial companies suddenly declared themselves out of existence.
Wikipedia defines a recession as a “business cycle contraction which results in a slowdown.” They reoccur regularly: From 1945 to 2001, the U.S. had 10 of them. Each recession lasted an average of 10 months, and each one was followed by an expansionary period averaging 57 months. Economists may not always agree on what causes a recession, but they do agree that such contractions are in the nature of the business cycle.
Where things stand at the moment depends on which of those economists you ask. In 2015, The Huffington Post’s Daniel Wagner predicted that “a financial crisis is right around the corner,” by which he meant 2016. That proved premature, obviously, but Wagner was far from alone in signaling that some sort of economic contraction was imminent. Such warnings continue to come from many directions. Lately The New York Times has weighed in by asking how long stock prices can stay at record levels, noting that “in interviews with more than a dozen money managers in the past week, nine senior investment managers or hedge fund executives predicted that a market decline of at least modest size was likely to occur in the near future.”
Key Measures to Take
No one can know for sure how the economy will play out. Many factors align to throw it in reverse and there is little or nothing an individual business owner can do to affect that. Your only option, apart from simply managing your business well and riding it out, is to plan for the effects of an economic downturn.
Here are the key areas in which you can anticipate and mitigate the impact of recession on your business:
Streamline costs. Be aware of your expenses and which ones can be reduced. Ask your accountant or bookkeeper for a line-by-line report on what’s being spent at your company. Inc. suggests you may find “you probably don’t need 20 percent of the things you’re paying for now …” The rule is to stop spending on anything that doesn’t increase income. In a downturn, companies typically focus on profitability and not so much on growth. And virtually all experts agree that cutting costs quickly is far better than extending your cost-cutting over months or years.
Accumulate cash. Cash reserves helped many contracting companies ride out the Great Recession. It was a strategy typically put in place by owners who’d been around long enough to have been through a recession before. In a down economy, cash flow is make-or-break, the key to survival. “Forget about the sales line on the profit-and-loss statement and instead examine the cash flow statement,” suggests Barry Moltz at American Express. “Do you have more or less cash at the end of the month? A simple check of your bank statement will give you the answer. Focus on getting paid by customers, extending payments to vendors, keeping stock levels low, and keeping inventory turns as high as possible.”
Reduce outflow, increase inflow, then put that cash somewhere it’s readily accessible. Finance expert and blogger Marco Terry suggests a bank account or money market account. How much do you need? “Consider building a reserve to cover at least three months’ worth of expenses. Six months is better, but that’s just my opinion,” Terry says.
Love thy customer. Homeowners generally re-side a house every 35 years. Shingle a roof? Every 20 years. In other words, decades will pass before your customer needs that particular service from your company again. But he or she may be in the market for other services you offer. Plus, homeowners know people, talk to neighbors, and use social media. The time to fall in love with your customers is before the recession, not in the middle of it, when every business suddenly showers its database with unwanted attention. “If you must know, existing customers are the most important key to surviving a recession,” notes website MyTopBusinessIdeas.com. “Customer service is a vital key to getting repeated sales; and repeated sales [are] essential to surviving a business recession.” Send the love by stepping up your communications with customers during and after a job.
Carefully adjust marketing budgets. Home improvement companies that sell siding, windows, roofing, or decks install short-cycle jobs that may take anywhere from a day to two weeks to complete. That means that in a year’s time they need a lot of jobs—hundreds—and to get that work they will need at least four or five times as many leads as the number of jobs they complete.
Lead generation costs money, and that marketing investment that's currently slotted as 8 percent, 10 percent, or 12 percent of revenue may look like a tempting target once your sales take a hit. In a recessionary environment, it’s typically one of the first places businesses cut. But experts advise that’s exactly the wrong thing to do. In fact, there will always be homeowners looking to replace exterior components. “The key drivers for growth for the home improvement sector are existing home sales (as homeowners tend to purchase their largest improvements just prior or just after a home sale/purchase), as well as the underlying conditions of the existing housing stock,” notes U.S. News and World Report. “Both of these factors forecast a solid improvement for the remodeling industry in the months and years ahead.”
But while home building may slow down—it declined by two-thirds during the Great Recession—the existing housing stock is older than it’s ever been. Homes age and exterior components must be replaced. That marketing expenditure may seem frivolous, but the key is to think in terms of ROI. More than ever, you need to know exactly what kind of return you’re getting and how that affects profits rather than sales. That doesn’t mean you shouldn’t adjust marketing, suggest John Quelch and Katherine E. Jocz, writing at the time of the Great Recession in the Harvard Business Review, but use “a scalpel rather than a cleaver.” They note that in lean times, businesses that “nimbly adjust strategies, tactics, and product offerings in response to shifting demand are more likely than others to flourish both during and after a recession.”
