Lessons From A Recession

By November 11, 2012August 31st, 2019Uncategorized

 

Bad times for most enterprises equals good times for those catering to the stressed, the depressed and the anxious. As measured by the marked increase in calls to mental health hotlines whenever the unemployment rate rises and more businesses begin closing their doors, recession packs an emotional and spiritual punch as well as an economic one.
While the human misery generated by an economy in recession can’t very well be directly measured, its effect on business bankruptcy filings can. And the number of business bankruptcies in 2008, the second year of recession, were up 38 percent to 89,402, according to a bankruptcy data firm. That’s the highest total since bankruptcy laws changed significantly in 2005.

That kind of increase is amazing, but the picture when you look closer is even more amazing. The 2009 bankruptcy increase is a smaller percentage rise than in 2008, when business filings were up by half to 64,318. And, even more incredibly, the reports as 2010 begins indicate that this year will be worse than last year.

What’s going on? Certainly, two years of recession have taken their toll. Many companies that were able to handle 12 months of declining sales found that 24 months of shrinking top-line revenues were simply too much. But, of course, not all companies have become insolvent, even those in the industries with the highest rates of bankruptcies, such as construction and auto dealers. This suggests that there is more going on than the inevitable response to economic contraction.

What the recession tells us, whether we look at the human stories or the dry statistics, is that there are important lessons from slack periods in the business cycle. Apparently, some business leaders have learned their lessons from past recessions. When these lessons have been applied during or even prior to this most recent recession, many of these businesses were able to survive and, in some cases, prosper while their less-prepared colleagues struggled to survive.

No better example exists than the side-by-side comparison of America’s two largest automobile companies. Executives at Ford saw the recession coming and prepared for it. General Motors’ leaders had access to the same data but kept doing business pretty much as usual. As a result, Ford required neither bankruptcy protection nor a government bailout during 2009. GM needed both.

While every industry, market and business is unique, some of the lessons of how to prepare for and survive a recession are general and nearly universally applicable.

1. See it coming
I’m not talking about being able to forecast macroeconomic trends. That is an art practiced by many but succeeded at by few. I am talking about being able to tell by analyzing your own company’s financial reports when demand is falling, debt is increasing and margins are shrinking.

Ford, for instance, saw the writing on the wall in 2006. Clearly, the company was going to have to accept a smaller share of the auto market.

That was the year it mortgaged virtually all its U.S. assets in exchange for the billions of dollars it needed to reorganize and resize to reflect is smaller market share. The move shocked most observers, but has proved one of the smartest by a major corporation in recent years. Ford avoided the bankruptcy that would have stripped the founder’s descendants of their super-voting shares to keep it a family-controlled company. In 2009, the worst year for autos in memory, Ford reported an annual profit.

2. Know how to respond
Managing through recession requires special skills. Many businesses are operated by owners who are, basically, technicians. They are former carpenters who have become builders and ex-truck drivers who have formed logistics companies. Few have the expertise do the financial analysis necessary to pinpoint where the problems lie and how to apply the techniques of business leadership to smooth performance and operations. The entrepreneurs who ride out recession after recession are generally those who understand that financials are not mere measurements of a company’s strength and success. They are the equivalent of vital signs to a doctor. Failing to grasp the effect of any move on the patient’s vital signs, to continue the metaphor, is the equivalent of malpractice.

3. Be decisive
Understand that you have to make changes, including some that won’t be fun or easy. When business is good, decisions tend to be easy: If someone threatens to leave, offer more money and a better-sounding title. If people complain about travel, send them first-class regardless of extra cost. But companies led by people who are more willing to make hard decisions tend to run both leaner and, if necessary, meaner. Sometimes workforces have to be cut, offices closed, product lines trimmed and even long-time associates let go. But necessary changes don’t get easier if you wait and procrastinate. Failure to be decisive may mean that you aren’t around to enjoy the next recovery.

4. Know when to call in help
Few business leaders can really do it all. Even the most sophisticated and resource-laden organizations occasionally look outside for expert advice and assistance. For businesses in peril, the sooner the request is made, the better. It can be painful to call in help late. When sales have already slumped and profits are disappearing, spending money on consultants or other experts may seem frivolous. But you should still spend it. And it’s easier to spend it earlier in the process of surviving a downturn, as well as more likely to produce positive results

Stress is always a traveling companion of challenging times. However, stress is not usually life threatening. It can be dealt with. By looking beyond today to the better times that follow, both ordinary people and business leaders can rise above the turmoil and find the energy and determination to keep going, act smart, and apply the lessons learned in past recessions. This downturn offered perhaps more valuable lessons than the usual slump in the business cycle. And, for that, perhaps we should be grateful.

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