The economy is in the news a lot these days. Some warn a recession is likely, while others point to the robust stock and employment markets as proof positive that the economy is still growing. What’s interesting to me about this debate is the role that psychology plays in the economy. When people are optimistic, they spend more and invest more — two activities that, in fact, grow the economy. And when they fear a downturn, they spend less, hire fewer people, and invest little to no resources in new opportunities, which of course, slows the economy even more. In both instances, our emotions are self-fulfilling prophecies.
Emotional impulses are hardly the kinds of indicators business leaders should hang their hats on, and yet so many do. It’s human nature. Still, when it comes to making decisions that will contribute to an expansion or retraction of the economy, we need to keep our impulses in check. The best way to do that is to forecast the impact of various economic trends on a company’s financials, and create multiple contingency plans to adapt to those trends.
Here are five steps to help your company plan for whatever the economy brings your way:
#1: Reduce Uncertainty, Plan For Risks
If you’ve been to business school you probably read about Knightian Risk. If you haven’t here’s the concept in a nutshell: economist Frank Knight posited that risk and uncertainty are different animals. Risks are situations where one can predict the range and likelihood of possible outcomes (e.g. what is the impact on our financial statements if sales decline by 10% this year?). Uncertainty is when it’s impossible to know what might happen. The difference is crucial because risks are manageable, but uncertainty is scary.
Uncertainty is always a part of life, but in a recession it can be all-consuming, prompting business leaders to make decisions based on impulse. Here’s where upfront what-if scenario planning comes into play. By testing possible outcomes upfront — both in good times and more challenging ones — and putting a response plan into place, uncertainties become manageable risks. On a psychological level, it means that the business leaders, and not some outside forces, are in the driver’s seat.
#2: Identify and Invest in Key Growth Initiatives
When management teams put their plans together for the coming year, they survey the sales teams to see what the pipelines look like and go from there. In other words, the plan is more or less business as usual. But the mix of customers, markets and product lines you nurture may not be your best growth opportunities during times of economic flux. For instance, when the country was facing a major recession in 2008, John Quelch wrote in Harvard Business Review that “Marketers must reforecast demand for each item in their product lines as consumers trade down to models that stress good value, such as cars with fewer options. Tough times favor multi-purpose goods over specialized products, and weaker items in product lines should be pruned.” Conversely, in optimistic boom times, specialized products could be useful hooks to introduce new customers to your brand.
#3: Get – and Stay — Agile
Companies that are agile are poised to exploit new opportunities as they arise, as well as weather the downtimes. There’s no secret to agility, it all stems from having a plan in place and ensuring that everyone in the company “knows the drill.”
Once again, planning for multiple scenarios and forecasting their impact on your financial statements is the best way to stay agile. It’s also critical to identify the drivers that can serve as your early signals to activate your plan. And in times of economic flux, be sure to update your forecasts on a monthly basis to identify potential surprises as early as possible.
#4: Have Your Story Ready
In good times and bad, customers, employees and investors all want to know: what do things look like for the company? Executing a major growth strategy, as well as weathering a recession, requires a good deal of confidence in the future, which means you’ll need to figure out ahead of time what your constituents need to know in order to remain confident. Obviously, you’ll need to be frank about the risks, but you should also do all you can to eliminate their uncertainty. Well thought out contingency plans, complete with balance sheet, cash flow and P&L forecasts, will allow you to articulate how the management team will lead the company through challenging times.
#5: Don’t be afraid to invest in marketing and advertising
When times are flush, businesses launch marketing and advertising campaigns, and when they’re constrained, such activities are the first to go. This is actually counterintuitive. If you advertise only during boom times, you’re competing in a noisy landscape. Conversely, if you’re one of the few companies to promote your brand during a recession, you’re far more likely to be noticed, and that can lead to long-term success once the economy recovers.
As John Quelch writes, “[a recession] is not the time to cut advertising. It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times.”
No one can say definitively what the economy will do in the quarters ahead. We may see continued growth, a mild correction or even a textbook recession. Thriving during all stages of the economy is a matter of preparing for all potential scenarios and being ready to respond.
About the Author
John Murdock serves as CEO for Centage. Centage’s Maestro Suite enables faster, more accurate budgeting, forecasting, analytics and reporting for small to mid-market organizations. With over 20 years of experience in the high tech industry, John is the driving force behind the company’s growth and transformation to a leading cloud-based solution provider. Follow on Twitter @centage.