Economic downturns present unique opportunities for individuals and businesses alike to expand, innovate and increase efficiency – those who take full advantage of them will be better prepared to weather the storm.
Individuals should regularly review their finances and create plans to cope if income or debt levels decrease or debt increases, while businesses should focus on customer retention while building up reserves for operating costs.
1. Keep Your Eye on the Long-Term Goals
Recessions can have devastating repercussions for businesses of all kinds; from lower sales and profits, reduced consumer spending, unemployment increases and other impacts that affect operations directly to ripple effects that impact economies at large and small scale. But there are strategies available that can help business withstand economic downturns more successfully.
Preparing for an economic downturn by keeping an eye on long-term goals is one of the key ways a business can prepare. This may include making strategic decisions like cutting unnecessary expenses, optimizing workforce utilization and effectively managing accounts receivable.
Keep an eye on competitors and understand their strategies for managing economic downturns, like the Great Recession. A recent study of nearly 4,000 companies before, during, and after this financial disaster revealed that winners de-averaged their response by increasing earnings at an average annual rate of 17% while losers saw growth at just 1%.3 To effectively navigate such volatility businesses should develop worst-case, best-case, and middle-ground scenarios to guide decision making processes during uncertainty.
2. Look for Opportunities for Growth and Learning
Have you heard the term “downturn” being bandied about in business news reports, particularly when applied to an economy or industry sector. For instance, car sales declining is considered a downturn for auto manufacturers while real estate construction and sales being down may signal real estate’s slowing growth rate as a downturn for real estate sales and purchases. A downturn is more than a dip; it represents a prolonged contraction of an entire country’s economy which leads to unemployment rise, decreased industrial activity decline and reduced consumer spending – the three elements involved with global economic expansion.
Economic analysts typically define a recession as two consecutive quarters of negative gross domestic product (GDP) growth; other measures may also be employed. A recession can have devastating repercussions for both small and large businesses alike, including reduced demand for products, higher risks associated with failure, cash flow issues that delay payments or lead to bankruptcy filings. While downturns are unfortunate events, they also present business leaders with unique opportunities to learn from past mistakes while better equipping the organization for future expansion.
3. Protect Your Assets
Economic downturns present opportunities to make costly mistakes that will cost money in the form of selling investments at a loss, deviating from your long-term investing plan and overlooking opportunities that present themselves.
Individuals can protect their assets during a recession by creating an emergency fund, avoiding high-interest debt accounts and investing in defensive consumer staple stocks – strategies which not only serve them during a slowdown or recession, but will help prepare them for an upswing afterward.
Diversifying your investment portfolio is always wise, but its significance increases during times of economic stress. Extra funds in your reserves can reduce the likelihood of having to sell investments at a loss and provide flexibility when new opportunities present themselves – something a financial advisor can assist with by offering guidance on how best to recession-proof your portfolio and identify these.
4. Stay Positive
At times of adversity and news coverage that’s less-than-ideal, it can be challenging to remain positive. To remain on a path toward healing and success, focus on what you can control.
While many Americans may be cutting down their dining out and vacation plans in preparation of an economic downturn, you can do much to prepare your finances for it. By saving, investing strategically and managing debts effectively you can build wealth through economic change.
If the current economic uncertainty has you worried about job security, consider shifting your portfolio towards “defensive” stocks such as health-care companies and consumer staples (like food, beverages and household products), which tend to do better during downturns, according to Fernandez. It would also be prudent to establish an emergency fund so you will always have money available should anything arise that requires immediate funding – get free weekly financial newsletter from CNN Business here and sign up here.