Who Will Survive and Who Will Fail? Part 3 of 3 Final Thoughts
So far, we have talked about how your attitude and getting liquid can prepare you should we go into recession. However, you could do everything right and events and/or other people could undo your efforts because they were not as prepared as you were. What are these things, who are these people likely to be and what can you do to minimise the risk they present?
If you sell or manufacture products then one of your most vulnerable points is your suppliers. How solvent are they and how prepared are they should a recession hit? You probably do credit checks on your customers; you should do the same on your suppliers. It’s no good you being prepared if they are not and as a result fail and you lose your source of supply. This highlights the need to identify and build relationships with more than one supplier for each of your products or raw materials. If one fails, you can still obtain supplies from one of the others, this is true in good and tough times.
Minimise Risk: Build relationships with more than one supplier for each product or raw material
Environment: Shift in buying behaviour
Particularly in a recession, the buying habits of your customers may change. Intriguingly my past experience has shown that in some cases rather than look for the cheaper alternative the buyers move upscale. They switch from a more ‘if I don’t like it or if it fails, I can replace it” to one of “I want something of quality that lasts or is a more standard design that will not quickly go out of fashion”. The corollary of this is that they may reduce the frequency of their purchases. Which leads to my next point on ensuring your clients know the perceived value of your product offering. You don’t want to get caught like a service company that had a full order book at 9 a.m. in the morning and they were wondering where they would find the people to do the work. Later that morning, oil prices fell significantly and by 3 p.m. their order book went from full to empty. The cause of these mass cancellations was because their clientele perceived the service they offered as a luxury. This despite the fact that their service could save their clients significant money, both from a safety point of view as well as an insurance policy that could save hundreds of thousands of dollars in rework, which is exactly what companies look for in recession. This is why it is critical to understand your clients changing needs, their buying habits, and how they perceive your product/service offering.
In the story above, prior to the recession, the company had discovered they couldn’t always get the supplies and parts they needed and as a result had established a manufacturing division to build these parts. In addition to their own use, they sold parts to other oil and gas service companies. During the recession where they experienced mass cancellations, which basically shut down their service division, sales of the parts continued although at a reduced volume. This diversification enabled the company to survive.
Minimise Risk: Understand your clients changing needs and communicate the value of your product/service offering. If you only offer a single product or service maybe look into ways in which you can diversify, so that if one product slows down the other will keep your business afloat.
Keeping in touch with your financial institution and keeping them informed of what you are doing is so important. They are will to work with you as long as they don’t get any surprises, they don’t like those. So invite them to visit your business so they get to understand the business and the challenges that you face. Show them what steps you are taking to maintain the profitability of your business. Make them an important member of your team. Remember that even in a recession, lending institutions still want to lend, they are just way more conservative.
Minimise Risk: Get to know your lender and make sure your lender understands your business.
Don’t be influenced by what you hear and read. Remember that media outlets love horror stories about business failures and the chaos caused by a recession. Often times blaming the recession and not the poor business decisions that caused the businesses to fail. That is not to say that there will be no sad stories. You have to remember that there will also be lots of success stories that don’t get reported, as doom and gloom sells better. As well, media love to put a negative spin on stories i.e. 7% unemployment instead of 93% employment and fail to mention that economists consider background (normal) unemployment to be about 5%.
Minimise Risk: Critically evaluate all the information that you are exposed to based on your own experiences.
A final thought – Fortunes have been and will continue to be made during recession by people who look for the opportunities rather than focus on the negatives. These are the people with energy, belief and liquidity to take advantage of the opportunities as they arise. Remember everything we have discussed in this series of articles also apply to your business in the good times. Contrarians are planning for the bad times in the good times and the good times in the bad times.