How to recession-proof a business

To say the economic outlook is gloomy would be an understatement. Look around the UK and reasons to be cheerful are few and far between. Inflation is at a forty-year high, energy prices are soaring, and many supply chains are fragile, clogged up, or just broken.

While a recession isn’t here (yet), companies should be prepared. More than that, though, they should be ready to capitalise on the many opportunities a crisis can bring.

Why businesses should adopt an anti-fragile mentality

You wouldn’t walk out under a rainy forecast without an umbrella. Wading into a recession without a strategy is the same thing. In the face of a downturn, many businesses will look to batten down the hatches, but this can be a missed opportunity.

A crisis creates openings– for example, if a competitor is liquidated then a whole chunk of market share becomes up for grabs. The key is to be in position, ready to capitalise.

How do you do this? I like to talk to businesses about Nassim Taleb’s anti-fragility. The basic premise is that resilience can be thought of as a triad – fragile, robust, and anti-fragile.

Taleb is a mathematical statistician and former banker who has authored several best-selling books on unpredictable events, or ‘Black Swan’ events. Recessions fall into this category. Nobody knows exactly when or why they will come.

What we do know is that fragile businesses are liable to break when they do. A robust business, on the other hand, can withstand uncertainty – but it won’t benefit. Anti-fragile businesses are the ones that seize the opportunities present in a crisis and thrive.

How to build anti-fragility into a business

Anti-fragility is built through adding capacity or slack to your business. In simple terms this is a strong balance sheet that prioritises cash, which can be used for investment; and having the right people, who can come up with clever solutions to problems.

To free up cash for investment, the CEO’s first port of call should be to check the business’s fundamentals. Put in place backup lines of credit, bring down aged debtors and make sure you have a strong relationship with existing shareholders. Then get to grips with the bottom of your P&L – understand your cost structure i.e., fixed costs and variable costs. Then run a sensitivity analysis – also known as a ‘what if’ analysis – to look at how changes in variables, like unit costs, affect profits and get your team to think about what they would do in those scenarios. This is not just a modelling exercise.

Are there alternative suppliers? Can you use that fact as leverage? Who can customers switch to if you need to raise prices? What can you do to retain them? Perhaps you can improve customer service, or offer loyalty rewards?

Your people are an equally important component. A CEO needs to know who is truly adding value to their business, and where the slack is. This may mean making tough decisions around who should stay and who should go. The results may not be popular, but are necessary to thrive.

Getting these decisions right before a recession frees your business to invest just as your competitors are pulling up the drawbridge: sweeping up customers, winning market share, and putting yourself in top position.

Fail to prepare…

The secret sauce in all this is the finance department. It’s a given that a strong finance team provides the business with accurate data on which all of the above decisions are based upon. But more importantly, they see across the entire business and can actively contribute to everything from sensitivity analyses to renegotiating supplier deals to staffing decisions.

Economic doom and gloom aside, if CEOs can get support from their finance team on the issues outlined here – they’ll build momentum so good times return.