Positives of an Extended Recession

You may wonder how an extended recession can be positive for your business. What can be good about weak industry performance, more competition for less orders and a tougher environment to secure debt or equity investment? Well, every cloud has a silver lining. So here’s an alternative point of view.

A short-term recession will typically lead to short-term measures in a business to survive a downturn. These measures typically revolve around cost-cutting, which while necessary, do not add value to your business. So, you survived the short downturn, but nothing fundamental has changed within your company.

To thrive in a longer-term recession, however, you need to improve your business, improve your processes, and become more efficient, more competitive, better aware and more responsive to changes in your business and industry.

If we had only gone through a 6-12 month recession, your company could have survived and subsequently thrived with the short-term fixes you made, returning to business as normal when the industry picked up. However, now that we have an extended recession, there is no real alternative but to think about creative and enduring ways to improve your business.

This is borne out by a recent survey by CFO Research Services and the Royal Bank of Scotland, which focused specifically on working capital performance. The report suggested that companies are still looking for ways to improve. At the top of the list, more than half of respondents suggested that they’re looking to further improve days inventory outstanding and days sales outstanding.

About half of respondents stated that most of the work had already been done. So, when asked how they would improve, the most commonly offered answers were standardization, reengineering and automation, all of which make core and enduring improvements to the business. There are also many other ways you should be seeking to make improvements to your unique business. It’s time to get busy.

When asked the reasons for seeking continual improvement, the most commonly cited reason was to “reduce financing costs” and “manage risk better”. In a recent ClearRidge article, we suggested that capital in 2011 is likely to be more expensive than most business owners and financial chiefs expect, so these improvements may be more important than you expect. Article link: Businesses likely to pay more for capital.

What does this mean for your business?

If you are working as hard as you were in your busiest boom times on making core improvements to your business, then the results are going to pay dividends in the coming years. While two businesses can look similar from the outside, you need to make sure that you are doing everything to make your business the one that has the re-engineered, roaring, high performance engine on the inside. Your competitors won’t be aware of the changes you have made until they’re trailing behind you when the economy picks up.

Then if the comes time that you need additional debt or equity capital to fund your business growth, your business will be the one that lenders and investors find attractive to lend to and invest in on terms that suit your needs, not the other way around.