The Federal Reserve recently raised the key interest rate by 75 basis points, or 0.75%, in another attempt to curb inflation, which is at a level not experienced by much of this country’s younger workforce. The relatively low unemployment rate we’ve enjoyed is now expected to climb as businesses respond with job cuts. If you’re a small business owner, you’ve likely had a few sleepless nights over the past several months.
But according to Kayvon Kay of The Sales Connection, there’s one important thing to remember: Recessions are going to happen periodically to disrupt periods of economic growth. It’s part of the four stages of the economic cycle, and it’s your job, as a leader, to prepare your business for each one of those stages and successfully weather each one.
“In many cases, this can be more difficult for the small to mid-sized business owner versus a large corporation, particularly if your company is still relatively young,” Kayvon said. “Regardless of company size, however, preparation is key. And despite a proclivity to cut costs through layoffs, some research suggests that rapid cost-cutting may not be the magic business salve.”
So, what should you do during a recession, and how will it prepare you for the next cycle?
Defense or offense?
As previously mentioned, many business owners have a knee-jerk response to cutting costs in response to inflationary pressures or a defensive mechanism. In contrast, other companies take an offensive approach by reinvesting in their company to poise themselves for a successful post-recession recovery.
Which one is correct?
Kayvon’s response is, “Both.”
“Research shows that selective cost-cutting for operational efficiency, combined with certain reinvestment activities such as in marketing or for some companies, research and development, are more likely to better weather recessionary environments.”
The problem with only cutting costs, according to Kayvon, is that operational efficiency doesn’t necessarily mean trying to do the exact same thing with fewer resources. In some cases, for example, efficiency is obtained through a combination of cutting costs and making an investment.
“A single focus on cost-cutting can also negatively impact morale and, with it, productivity,” Kayvon warned. “Similarly, continuing to innovate and spend without regard to expenses can be like wearing blinders to the realities of your customer’s environment, and it’s bound to catch up to you.”
Rather, Kayvon advises business leaders to pair up some defensive and offensive approaches that make sense for their company and their marketplace. For example, improve efficiency and invest in new assets. Cut your headcount and develop a new market.
“More specifically, don’t let your product or service quality suffer,” advised Kayvon. “Work on creating a payment incentivization program for your customers, such as a certain percentage off for payment within X days. Tactics like these can create customer loyalty during, and after, a recession, as well as set you up more positively for the next cycle.”
Finally, Kayvon counsels business leaders to remember that, whether a company is B2B or B2C, both businesses and consumers still make purchases during a recession; they may just make fewer of them, or their priorities change.
“Can you be agile enough to shift with them or ‘loud’ enough to be heard when they’re ready to buy? Approaching a recession with that mindset versus panicked cost-cutting can shift your way of thinking into one that’s more pragmatic,” he said.
Because in business – as in life – it’s typically common sense that offers the best protection during the storm.