Business Planning For An Economic Crash

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Recessions happen, and we economists are not very good at alerting companies ahead of time. So business leaders should have contingency plans in place well before their sales turn down. In the article How A Business Can Survive An Economic Crash, I explained the action steps needed in a downturn. With that background, we can see the advance planning that will smooth the way for the action steps—and perhaps set up the company to beat the competition in the recovery.

Cash is king in a recession, and the recession contingency plan sets the foundation for solid cash flow. Two great benefits come from sketching out a recession contingency plan ahead of time. First, companies that have contingency plans act faster. That’s a large benefit. Businesses that dither in the face of a sales decline are far more likely to go bankrupt than those that take prompt action. The time lag isn’t so much due to analyzing the problem. Most good business leaders can easily figure out what needs to be done. The time lag is getting up the nerve to execute the plan—to cut labor expenses, to trim inventories, to delay expansion plans. When the executive team has been involved in developing the contingency plan, they will buy into the execution of the plan faster than if the plan is sprung on them in a rush. Thinking through the contingency plan ahead of time cuts the time lag significantly, which dramatically improves the odds of success.

Advance planning for a recession has a second benefit. In a relaxed time, the company can outline a plan consistent with long-term strategy and values. Before the 2008-09 crash, Caterpillar developed a recession contingency plan that reflected its business strategy of selling through dealers. Company executives knew that for the company to survive, its dealers also must survive, so they could not push too much of the pain onto them. That insight is much easier to see in good times than when panic has set in. A company should also think about its core values and ensure that the recession contingency plan reflects them.

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