At the time of writing (mid April 2019), it is still unknown the full effect leaving the EU will have on the UK economy. Doom-mongers and experts alike are predicting an economic downturn, with the Bank of England predicting a 25% chance of Brexit triggering a recession.
But there are ways in preparing for a downturn and planning in order to negate the worst effects. Cash is king in a recession, and any recession contingency plan sets the foundation for solid cash flow.
First, companies that have contingency plans act faster. Businesses that dither in the face of a drop in sales are far more likely to fail than those that take prompt action. The issue isn’t so much o analysing the problem – most good business leaders can easily figure out what needs to be done. The issue is developing the courage to execute the plan—to cut staff costs, to trim stock holding, to delay expansion plans. Thinking through the contingency plans ahead of time cuts any implementation lag significantly, dramatically improving the odds of success.
Advance planning for a recession has a second benefit. In more affluent times, a business can outline a plan consistent with long-term strategy and values. Before the 2008-09 crash, Caterpillar developed a recession contingency plan that reflected its business strategy of selling through dealers. Company executives knew that for the company to survive, its dealers also must survive, so they had to be “looked after” and supported, for example with additional time to pay an invoice, extra discount or both. That insight is much easier to see in good times before panic sets in. A company should also think about its core values and ensure that its recession contingency plans reflects them.
The next part of a recession plan is to think about trigger points: When will the contingency plan be executed? Instead of waiting for experts to declare a recession, the main indicators to watch are company sales and orders. Some businesses may have good leading indicators, such as enquiries or requests for proposals. Some companies may watch other companies or industries that usually trigger spending. Whatever the company, it should, ahead of time, develop the indicators it will use to identify a downturn.
How do you know when a downturn has hit? A good rule of thumb is that the average recession is half the magnitude of the 2008-10 downturn. Calculate a company’s sales drop on a percentage basis from peak to trough during that period; divide by two, and apply that decline to your most recent level sales.
Run that sales decline assumption through a financial model to see how cash flow would look in a typical recession. One company may find that it’s still profitable, while another will be in the red but cash positive, and the worst case will be watching money leave the bank account faster than it comes in. Adjust short term expenditure plans and capital spending changes until cash flow is at least positive. Loan terms must be checked, as sometimes positive cash flow isn’t enough to satisfy bankers.
The final step in the recession contingency plan is thinking through upside possibilities. If survival looks likely, how can a business gain from competitors’ pain? Perhaps assets can be acquired cheaply, or even entire companies. Sketch out some desired gains, identify what to look for, and set up a monitoring system to know when another company may have good assets for sale going cheap.
Recession contingency planning does not need to be complicated, but developing it ahead of time will set a company up for surviving the next economic crash and thriving in the following recovery.