By Michael Evans and Mark Rosenman
Entrepreneurs tend to optimistic by nature. As 2016 begins there is ample reason for many entrepreneurs to feel good about the new year. The latest signs of an improving economy were strong enough to help persuade the Federal Reserve to raise interest rates recently—for the first time in nearly a decade. A boom in valuation of technology-based companies, private as well as public, is driving expansive optimism in that sector.
But storm warnings are already on the horizon with the Chinese stock market down 7% in the first trading day of the New Year and the U.S. Dow Jones Index down 276 points, the weakest start of the stock market in 84 years. Early warning signals?
But what if the economy in 2016 begins to weaken as many economists expect? Extreme pessimists are usually wrong … but so are extreme optimists. A downturn, caused by the natural ebb of the economy or by a shock such as a geopolitical crisis, is always a possibility, bringing back conditions we remember all too well from the years after 2008: declining revenues and margins, excess capacity, anxious employees, and restless investors. Even if a recession doesn’t come to pass, your company might have its own downturn this year, caused by a new competitor or new substitutes for your products and services.
Why not start 2016 with a resolution to do some contingency planning for the possibility of a downturn later this year? Below are four steps to take to manage your way through a potentially very challenging year:
1. Manage profitability
Most companies have a relatively narrow margin for error. A 10% decline in revenue could wipe out the entire bottom line of your company. Having a contingency plan to produce marginal, short-term profit despite a drop in revenues can make all the difference.
Consider doing the following:
- Develop forecasts based on optimistic, realistic ,and worst-case revenue scenarios.
- Formulate contingency plans. Make sure your top managers are on board with the plans, and are ready to act quickly if revenues decline.
- Agree with your management team on early warning signals, such as a shrinking backlog, a downturn in customer-market indices, or a worsening sales pipeline.
- Be willing to adjust discretionary spending at more frequent intervals; for example, quarterly, or even on a rolling basis.
- Be ready to keep bankers and investors appropriately informed in case of a downturn and to communicate the actions you’re ready to take to limit the damage.
2. Identify and maintain your strengths—and your best customers
Identify the strengths that have enabled your success to date, and those that will be important in the future. Which capabilities and skills are most critical? What distinguishes your ability to serve customers effectively?
Identify your highest-margin customers, and understand what you are doing right for them. Develop a game plan, in the event of a downturn, to protect and build on the strengths that have allowed you to be indispensable to them. In the event of a dip in business, rather than cutting costs across the board, be ready to shift resources to retain these high-margin customers.