According to Bloomberg economists, there is a 27% chance that a recession will occur within the next 12 months. With both global economic and domestic GDP growth cooling off, many people are starting to wonder not if, but when the next financial crisis is going to begin.
If you own or lead a manufacturing business, it’s best to face this uncertainty like a Boy Scout: be prepared. Research shows that companies who entered the Great Recession positioned to protect themselves rebounded exponentially better than those who were taken off guard. In this article, we’ll discuss a few of the ways manufacturers can set themselves up for maximum resiliency in the event of an economic downturn.
#1 – Diversify your revenue stream.
If your largest customer closed their doors, what would the repercussions be for your company? At goBRANDgo!, we like to say that we never want to be one phone call away from having to make tough HR decisions. Economic challenges that begin further up your supply chain will eventually spread to your company, as your customers’ problems become your problems. If your revenue stream largely depends on the success of one, two, or five large customers, a recession can put your business in a precarious position.
There are many potential strategies to pursue if you need to diversify your customer base. Exploring new target markets across different industries, attending different trade shows, and forming strategic partnerships are a few examples of ways companies go about tapping into new audiences.
#2 – Evaluate your expenses.
The time to sharpen your pencil and get out your trusty fine tooth comb is now. Look closely at your P&L to find areas of discretionary spending you should re-evaluate. Common areas that businesses look to reduce are travel budgets, per diem, office supplies, and other “nice-to-have” creature comforts.
Take a look at your monthly charges for subscriptions, software, and other expenses on your credit card statement. Forty dollars every month here and there eventually adds up to real money! Perform an audit of these expenses and determine whether you still use these products and services, then cut the ones you don’t. As a best practice, change your credit cards every two years—it will force you to take a look at these recurring charges and decide which ones to renew.
#3 – Reduce inventory levels.
During a recession, you’re going to need your dollars to keep company operations going—not sitting on your shelves in the warehouse. Take a walk around and ask yourself how much product you actually need on hand to satisfy your customer needs. Now is also a good time to look back at inventory trends in your business and adjust accordingly.
There are different tactics manufacturers can use to bring inventory levels under control. A few examples are shortening supplier lead times and negotiating increased minimum order quantities (MOQ’s) with customers where you can.
#4 – Fatten the piggy bank.
It’s no surprise that companies who entered the 2008 recession in a strong cash position bounced back faster after the crisis. During an economic downturn, your sales are sure to slow and banks are sure to grow hesitant to give out loans.
Depending on your business and industry, aim to stash enough money to cover three to six months of expenses in an account you won’t be tempted to touch. Your reserves will allow you to weather the storm while your competition is scrambling to keep the lights on. Also, your resiliency in the wake of a recession may be rewarded with greater market share, as you’ll be better equipped ability to resume your normal operations and meet customer demands.
In fact, there’s even greater upside potential for businesses that save. Economic downturns present the opportunity for acquisitions at a lower price, when others are eager to sell. Played just right, this can allow you and your business to build wealth that will lead to great outcomes in the future.
Preparing your manufacturing business for recession before a crisis occurs is critical to ensuring its resiliency. Companies who are proactive in preparing are sure to succeed faster once a recession passes. Start thinking like a Boy Scout today and get prepared!