What to consider in a down economy

“The best offense is a good defense.”

For sports fans, it’s a cliche as old as the games themselves. Coaches, announcers, fans, and players recognize the truth in the classic phrase. The truth carries weight in business as well. A strong defense can withstand economic turmoil and lead to great success when the tables turn compared to the competition. 

Businesses are on defense.

The reality is businesses are not on offense right now. We are seeing significant downfalls from giants such as Salesforce, down 48% in 2022; Tesla, Amazon, and the S&P 500 dropped big in 2022. The great resignation and explosion of hiring signs quickly turned into cuts by many large businesses. Meta, Amazon, Lyft, Salesforce, Cameo, and more have reduced their workforce. The IBJ just reported Amazon’s elimination of 18,000 jobs at the onset of 2023 and Salesforce’s 10% reduction in labor. Tech is being hit hardest, but the breadth of the downturn is widening. Goldman Sachs, Stitch Fix, DoorDash, Zillow, Carvana, and Redfin also laid off a significant portion of their workforce within the last year. 

Small businesses are feeling the effects of an economic downturn as well. Despite an 87% growth in small businesses revenue, profits dropped by 4% between July 2021 and July 2022 due to inflation costs. They, too, are beginning to cut labor as the effects of recession on small business become more and more evident. 

The question everyone is asking

We engage with hundreds of small business leaders, from clients to prospects, to friends, or even our team members. Milestone is fortunate to work with a wide span of clients, including SaaS, non-profits, education, and healthcare, that provide a pulse of entrepreneurs’ thoughts. Questions are building in these business leaders mind: What small businesses do well in a recession? What businesses get hurt in a recession? What should businesses do in a recession? In one way or another, they are all asking:

“What should I consider when making decisions in a down economy?” 

You cannot and should not change your business model just because a recession looms. Figuring out companies that grew during the 2008 recession will not help you make better decisions for your business. What will help your business be among the small businesses that grew during the next recession is following these 4 business strategies. 

4 business strategies during a recession all companies should consider: Recession-proofing your business. 

1. Ground decisions in reality – Business leaders need accurate, timely, and meaningful financials and KPIs. 82% of businesses that fail report cash flow mismanagement. This mismanagement comes from financials that are not timely, accurate, or meaningful. Without impactful data, businesses will make uninformed decisions in an unforgiving economy. 

2. Look toward the future with current concerns – Creating multiple forecasts for different decisions, such as hires, cuts, new product releases, etc. is a tactful way to navigate both downward and upward-trending economies. At Milestone, we leverage monthly financial forecasts to run scenarios and perform sensitivity analysis to understand potential outcomes.  While this kind of crystal ball exercise can sometimes be difficult, it can be an invaluable resource to support decision-making when you use the right tool and ask the right questions.  

3. Sharpen your focus – Business is NOT feast or famine during a recession. Instead, feasting leads to famine. Businesses need to drill down on needs vs. wants. Optimizing the essential operations for your business allows the company to weather the storm better than trying to expand the business. Expansion risks spreading the company too thin. Use steps one and two to focus on your areas of high impact and take appropriate, calculated risks rather than casting as many lines as possible. 

4. Cut people, not the function – As we have already seen, staff cuts, large and small, are already here. Many businesses look to cut people in Accounting, Finance, HR, Marketing, and Client Experience. While these cuts can result in short-term cash flow relief, they can also be detrimental to the business’s long-term health. Trying to share these responsibilities often leads to an unfocused approach to these essential functions. Consider fractional services as a path forward. Fractional services can provide expertise at multiple levels of the business. This expertise helps drive best practices in their respective function. For example, a small business may not be able to afford a full finance team, but they need the expertise and data a whole finance team can provide. Fractional services can bridge this gap by providing multiple levels of expertise without breaking the bank. 

How a slowdown can speed up business

An economic slowdown is a birthplace for opportunity. The opportunity may not be as dramatic and grand as Airbnb’s explosion on the tail end of the Great Recession, but it is there for every business. A down economy is the place for a competitive edge. Apple CEO Tim Cook has been quoted saying, “We believe in investing during downturns.” Seeking the opportunity in downturns and investing in your business can be a launching pad for growth, so long as you stay grounded in reality, be forward thinking, narrow your focus, and keep the business functions.