An Economic Recession Can be Devastating to Your Business:

Should You Focus on Accounting Profit
During a Recession Cycle?

An economic recession can have a devastating effect on small businesses. Is there a recession definition that fits today's business climate? Are there any recession proof businesses? What strategic actions can you take to minimize the impact of this recession cycle?

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Almost all businesses are feeling the effects of the economic recession we are currently experiencing. There are some recession proof businesses (well maybe some almost-recession proof businesses); such as in health care (people still need to take care of their health); fast food businesses seem to do well in a recession - people are going to expensive restaurants but they still want to go out; grocery stores (people still shop for the basics); and so on.

A Recession Definition

There are a number of definitions. In short, the economy declines or contracts (negative Gross Domestic Product (GDP) is the usual descriptor) - usually for a minimum of two consecutive quarters. In many of today's markets, there is more supply, than demand. And there is more capacity, because there is reduced demand. Additionally, unemployment rises during an economic recession.

New market trends are showing up during this economic recession; for example, there have been shifts in demand from newspaper advertising to online advertising (to the detriment of newspapers, and to the growth of organizations like Craigslist).

This is even more true today, while we languish at the bottom of this severe recession cycle.

Businesses are facing growing pressures and challenges from the marketplace in today's economic climate. Pressures (such as the need to make fast decisions, react to changing markets and environment, handle new and different opportunities, aggressive competition) need to be quickly identified and acted upon.

How Long Will This Economic Recession Last?

Recent media reports are indicating that we may have, or shortly may be, hitting the bottom of the recession cycle. However, media and financial analysts are also reporting that coming back from this recession will be slow ... expect a couple more years of weak demand.

Many small business owners have seen demand drop significantly, and watched their financial statements and financial ratios (measures of business health) worsen; growth strategies now are really just focused on 'stepping' up to where we were just last year or the year before. Real growth will be planned and managed, once businesses feel they can survive the current economic recession.

Economic Recession: Key Actions

1. If you're selling business to business and/or are in the manufacturing business, consider re-building and re-thinking your pricing strategy. In today's market, you need your price program to be more agile than ever before. You need to be able to respond when it's necessary (under threat of losing business, or threat of increased competition, or more). Change the price offer. Can you offer more, for less? Can you offer less, at somewhat of a lesser price? Can you offer more (much more), at a somewhat higher price? Develop your survival strategy for this economic downturn; change your management focus and change your management actions.

   Your pricing adjustments or discounts need to focus on retaining profitable customers who are easy to work with and who pay on time. Don't discount your price to non-profitable or difficult-to-work-with customers! And don't discount your price to customers you have to chase (for days, or weeks, or months) for invoice payment.

2. Focus on cash flow in the short term. Also focus on marginal profit over accounting profit (during slow times). The question of, 'What is profit?' (or what is acceptable profit?) needs to be understood in a somewhat different context during an economic recession. Companies I work with that normally expect 15 to 18% profit, are happy to receive 5% profit on their work during this recession; however low profits cannot sustain a business long-term.

3. You might not be one of the , but if you have some cash in reserve you might still be able to earn a profit or invest in a better future. Look at your longer term capital expenditure needs. Can you get a great deal on a new (or gently used) forklift truck? Can you get a 'smoking' deal on new computers for the office? This is a great time to buy equipment – if you have cash AND if you needed to buy that equipment anyway.

4. Also consider horizontal or vertical mergers or acquisitions as a way to grow volume (quickly) and a way to cut fixed costs; this is a strategy that needs significant research and review before decision making. Does the opportunity to invest in a business (or a product or service) provide you with good/great leverage in the marketplace? Does it provide you with some cost savings opportunities? Does it provide you with opportunities for increasing gross margin and/or accounting profit? Does it fit your overall mission and vision statements? Does it fit your strategic plan? Also, does the merger or acquisition give you an advantage against your competition that they will find hard to match or imitate?

5. Focus on managing your business by using good quality of information: make sure the information is timely and current; that it is relevant and measures things that count, that it is useful, it is action-focused – it will help you make decisions and/or support your action plan; that the information collection is repeatable – it can be measured at different times and still make sense, and that the information is reliable and accurate.

   Having, accessing and using powerful business metrics will give your business a unique competitive advantage.

• Financial statements are good starting points but not as valuable for management tools or decision making. These statements are more of a reference point and are really designed to keep score, not to provide reasons for the outcomes. They also measure dollars, not cost or revenue drivers. And they are primarily prepared for, and focused on, delivering messages to those outside the company (i.e. bankers, other lenders and shareholders).

• Financial ratios are also good at score-keeping, at comparisons, and at plotting trends but not useful for decision making or providing diagnostic analysis. If using financial ratios for trend analysis, make sure that you use good data: what is the range of the population; the size; what is the population skew; what is the standard deviation; what is the coefficient variation; etc. These are normal statistical data criteria.

Some businesses will not survive this economic market 'shrinkage'. Don't be one of those businesses. Think specialty. Think niche products or services. Even if your business is diversified, and you're offering a wide range or variety of different product or services, find a way to focus on those products or services that make you different, and special, and that others would find hard to replicate.

Recessions are cyclical; we've experienced numerous recessions over the past 50 years - it's the depth, the breadth and the length of the recession cycle that is hard to predict and impossible to manage.

The marketplace always looks somewhat different at the end of an economic recession than it did at the beginning of the recession cycle; be proactive and change and adapt to the market under your own terms upfront, don't let the market force change on you.

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Part 1 of 2 ... continued in Part 2 How To Survive A Recession?

Read More:

Return from Economic Recession to Managing.

Or Return from Economic Recession to More For Small Business.