4 Ways to Weather A Recession

4 Ways to Weather A Recession

As 2019 nears its end, it’s hard not be concerned by all the speculation surrounding a 2020 recession. Major news outlets like The Wall Street Journal, Bloomberg, and The Economist have all covered the likelihood of a market downturn.

Many economists cite trade wars, rising interest rates, and the end of global stimulus packages as contributing factors to a 2020 recession (Source). Immigration is also a primary concern, as labor shortages in the STEM fields make it difficult for companies to attract and retain top talent.

In a study conducted by Duke University and CFO Magazine Global Business Outlook, nearly half (48.1%) of U.S. CFOs believe that the U.S. will be in recession by the second quarter of 2020, and 69% believe that a recession will have begun by the end of 2020 (Source).

So, while it’s difficult to predict a recession with any degree of certainty, CFOs can prepare by understanding and applying different strategies adopted by successful companies during past recessions.

The Challenge

During the 2008-9 recession, “few [companies] made contingency plans or thought through alternative scenarios,” according to a report by Bain. “When the downturn hit, [organizations] switched to survival mode, making deep cuts and reacting defensively” (Source).

Many of these companies failed to recover afterward, unable to transition out of survival mode once the economy improved.

As an alternative to this reactionary approach, Walter Frick from the Harvard Business Review argues that to survive a recession companies should focus on four key areas: debt, decision making, workforce management, and digital transformation (Source).

Debt

Companies who have a large amount of debt are the most at risk during a recession. Without cash on hand to cover interest and principal payments, many organizations have to lay-off employees to prevent defaulting on loans.

Companies should consider deleveraging, as measured by a change in their debt-to-asset ratio. Finance and executive teams should begin this process early in order to achieve relative financial stability during a recession.

To aid in this process, Corporate Performance Management (CPM) software can give companies a single source of the truth, as well as a clear overview of company expenses and debts. Also, with access to sophisticated forecasting tools, finance teams can help executive leadership make strategic decisions based on real-time information.

Decision Making

In a 2017 study, Raffaella Sadun (of Harvard Business School), Philippe Aghion (of Collège de France), Nicholas Bloom and Brian Lucking (of Stanford), and John Van Reenen (of MIT) found that decentralized companies were the most successful during a recession (Source). They attributed this to being able to “delegate decision-making further down the hierarchy, [making them] better able to adapt to changing conditions” (Source).

While it’s not necessarily feasible to drastically alter your organizational structure, it’s important to understand that decentralization “matches decisions with expertise” (Source). Even without major reorganization, executive leadership teams should look to gather input from employees to open the door for new possibilities and experimentation, which are often critical to a company’s success during difficult economic times.

The Office of Finance is also an invaluable resource. With access to insights from CPM software, finance teams can facilitate collaboration between multiple departments to determine the most effective ways to cut costs or restructure.

Workforce Management

Workforce management is also another tactic that can be leveraged by C-suite executives. While many people associate a recession with layoffs, this doesn’t always have to be the case.

It’s expensive for companies to hire and retain talent, so it is in their best interests to keep qualified staff on the payroll. Layoffs can also affect productivity and morale, which may already be at risk.

Instead of laying off employees, successful companies should look to streamline operations. Some examples include reduced hours, furloughs, and performance pay. This allows organizations to exercise discretion over which employees are affected, allowing them to keep productive team members as well as consider new hires for specific departments.

Studies have also shown that employees rely more heavily on performance pay during a recession (Source), which gives companies an opportunity to adjust workers’ incentives with changing conditions, as opposed to drastic hiring freezes or pay cuts.

Effective personnel planning using CPM software can also help companies take advantage of their most important resource – their people. Finance teams can determine the impact of personnel on consolidated profit and loss statements, while also incorporating variables like taxes, benefits, transfers, position changes, restructuring, bonuses and incentive planning.

Digital Transformation

As we’ve learned so far when a recession hits, most companies tighten budgets, re-forecast and typically look at ways to control costs and squeeze margins.

In contrast, some of today’s most innovative companies invest more in research and development (R&D) during a recession, aiming to have a competitive advantage when the market improves.

A great example of this approach is Apple – Tim Cook has been quoted as saying, “we believe in investing during downturns” (Source). So, while they are bringing in less revenue, they are also increasing their investment in research and development to ensure continual digital transformation despite the market conditions.

To invest in R&D, companies need to have a clear picture of their profitability. With CPM software, finance teams can quickly and effortlessly evaluate the crucial profitability measures at the individual product level, product line or even by project. Most importantly, CPM software can also help the Office of Finance evaluate ways to improve profitability and analyze the impacts that potential adjustments may have, including a greater investment in R&D.

Conclusion

There are many different approaches companies can take to limit the financial impact of a recession. In today’s blog, we looked at debt, decision-making, workforce management, and digital transformation as a means to secure the financial future of your company.

To learn more about the value of that Corporate Performance Management software can bring to your organization, watch our demo.

Prophix

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