We are living through challenging and difficult times. The understatement of the decade. Our heart goes out to small business workers and owners who have seen their lifetime’s work, their hopes and dreams, decimated through no fault of their own. While parts of the country are reopening, others are not. Even those that have seen openings and business improve have over a year of lost revenue.
In an effort to help, this article is about what we can learn from previous downturns and recoveries – what we learned from the past will help guide us through the business side of these turbulent times. This perspective on the economic implications of the current crisis takes on two related perspectives: 1) lessons we can take from previous economic cycles, 2) lessons for businesses today that small business leaders should take to heart moving forward.
Lessons from the Past
A great deal of research has been conducted on previous economic downturns. We know, for example, that the main reasons for failure during a recession are threefold. First, a lack of liquidity. Companies may have the assets they need to endure an economic downturn, but they are not liquid enough to survive. Second, those that don’t adjust fast enough fail. You can’t act quickly enough. Act. Now. Those with the best chance of enduring are those that make the hard decisions quickly. Finally, those in sectors not prepared for quick change fail more often.
Change your business model quickly if need be.
For small businesses now, some clear conclusions have emerged:
- Cash and liquidity should be pro-cyclical. Companies should build cash/liquid positions through periods of expansion. Companies that thrive in the future are those that build a strong liquidity position. That sounds like crazy advice when many of you who are reading this are just trying to figure out how to say afloat, but as we move to recovery, an increasing proportion of your revenue needs to go to a liquidity position. The old advice was to have at least two to three months of liquid assets on hand in case economic conditions deteriorate; this should now be 12 months. As challenging as it may sound now, start building cash now.
- Second, we know from previous downturns, that customers who shift to a lower priced alternative during a period like this, don’t come back over a three to five-year period. Research has shown that 75 percent of consumers that shift to a lower priced alternative during an economic downturn don’t come back to the higher priced alternative; the number is 85 percent in the Business-to-Business markets. The rationale is clear: they find that the lower priced alternative is “good enough.”
- Working at home to large gatherings to where we buy our products, we have seen a fundamental shift in attitudes and perspectives. It’s not too late to change your business model.
Guidelines for Small Business for the Present and Future
As we look to the past for insight for the future, some clear guidelines emerge for anyone leading a company from Main Street to Wall Street during these extremely difficult times:
- Take care of your people – be in it together (at the end of the day, that’s all that matters). That doesn’t mean business as usual, staying the course, paying everyone as usual. Make the hard decisions.
- Think “Right-to-Left” – Where do you want to be in October? Do what you need to do to get there now.
- Liquidity, liquidity, liquidity – get liquid as quickly as you can. This is the lowest interest rate environment in memory – the Federal Reserve has lowered interest rates to effectively zero. Access this as quickly as you possibly can.
- Those with the best chance of thriving moving forward are those that make the hard decisions quickly. Act. Now. Don’t wait. Fight for share.
- Be ready for the growth. Now. Find points of strategic control and access them now. Transform for disruption if possible. If you have the flexibility, use this as an opportunity to invest in the future.
What you do now will have a significant impact on not only your chances to survive through this downturn but thrive as we come out of it. But you have to act now.
Dr. Bill Putsis is Professor of Marketing, Economics and Business Strategy at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill and also teaches on Executive Programs at the Yale School of Management. Bill is the President and CEO of Chestnut Hill Associates, a strategic consulting firm that he founded in 1995 and partner in CADEO Economics, a management consulting firm specializing in using applied game theory to manage and preempt competition. He is also a co-founder of Brij, a startup aimed at helping small businesses and The Platform for Strategic Growth.