When the economy is booming, everything seems easy. There’s increased demand for your services. You have the necessary cash flow to invest in new technology and new employees. And your profits are so good you can’t stop sneaking a glance at your bank account balance.
But then something dramatic happens. The tech bubble pops, or the consumer debt crisis rears its head, or worse, a sudden economic shock turns the world upside down, much like COVID did this spring. If you’re not prepared, that shift from “easy money” to “holy s**t” can cripple you.
As an entrepreneur (and yes, even private practice dentists are entrepreneurs), it’s inevitable that your business will go through a recession. Economic recessions, defined by two consecutive quarters of negative economic growth combined with increased unemployment and slowing manufacturing and retail sales, happen every 10 to 12 years on average. They’re a contributing reason why 70% of small businesses never make it to the 10-year mark. And even when a business does survive a recession, it typically takes years to recover.
Be Prepared for the Next
How you react and make decisions during and immediately following a recession will have a huge impact on your ability to survive – and even thrive – during the next one. I know, because my agency, Golden Proportions Marketing, muddled through the Great Recession. The years 2008 – 2010 came close to crippling my young business (not to mention my sanity) but they also taught me some valuable lessons.
What I learned from that recession made sure we were not only prepared for this one, but that we actually thrived and grew, far beyond our original pre-COVID projections, in spite of the world losing its mind. This kind of result happens to only 9% of companies during a recession, and I want you to be one of them the next time around. Here’s what you need to know.
Lesson #1 – Cash is King
Why it Matters:
You’ve heard this saying before, and it’s a cliche for a reason. Recessions are driven by a slowing economy. Unless you’re in an industry that benefits from sheer happenstance (for example, the toilet paper manufacturers this past Spring), it’s inevitable that your business will take a hit. When sales slow but your costs remain the same, there’s less room in the budget to absorb those losses.
Sure, you can slash all unnecessary expenses and lay off employees, but the one cost you can’t cut is your debt. The more debt you have, the more cash you need to make principal and interest payments. Companies who are over-leveraged have to make the most aggressive decisions about cutting costs, which inevitably make them less competitive and less productive, resulting in significantly longer recovery time. It’s a vicious cycle.
What to Do About It:
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Learn to Hate Debt.
Don’t get sucked in by the low payments of a long term loan, and put extra money towards your principal every month that you can. This applies to home debt as well as business debt because your recessionary business decisions will be influenced by what take-home income is needed to keep up with your personal debt.
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Put Profit First.
Decide how much profit you want the business to make each month. Open a solvency account, and put a percentage of every single sale into that account. Even in the middle of the last recession, while still paying off debt, we started this strategy. We put aside 1% the first month, 2% the second month, and kept growing until we hit our target profit percentage. It seems counterintuitive to put money in a lower-earning savings account when you have higher interest debt but do it anyway. Keep saving until you have three months of operating expenses.
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Get a Line of Credit (but don’t use it.)
When recessions hit, banks are inundated with loan requests. Loan officers are less likely to approve you, and approvals take longer. You might not have the time to wait. If you lock down your LOC before you need it, it will be there when you do need it.
Lesson #2 – Make Decisions Quickly
Why it Matters:
Successful entrepreneurs typically make decisions quickly. As a general rule, entrepreneurs make the correct decision about 70% of the time, but they don’t let the “wrong” 30% stop them. If they find out their decision was wrong they will quickly pivot to a new direction. Supported by the lesson they learned from that wrong decision.
If you are someone who needs to know every bit of information about every option before you decide what to do, you are bound to lose. Your competitors are making decisions fast, and the consumer will take notice of whoever takes the lead.
What to Do About It:
Emotionally driven decisions are typically bad for business. Going with your gut is fine for everyday decisions, but not something to count on when you have to make an important decision quickly. When faced with a big issue, ask yourself these three questions:
- What’s the upside of this decision?
- What’s the downside of this decision?
- Can I live with the downside?
These questions will help you weigh the pros and cons. They will also serve as a reality check when you consider the long term consequences of your choices.
Lesson #3 – Double Down on Efficiency
Why it Matters:
When every dollar counts, efficiency matters even more. Efficiency equals leverage, meaning you can do more with less, and leverage is one of the secrets of big business. The Law of Leverage is also called the Principle of Multiplier Effect. It involves duplicating yourself using other people’s time, effort, and resources.
What to Do About It:
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Systematize Everything
If you do a task more than once, it deserves a system. Systems are just a series of steps necessary to complete the task, leaving nothing to question. They assign responsibility, have clear cut outcomes, and eliminate time spent on decision making. Systems ultimately improve the quality of your work, because you can count on a nearly guaranteed outcome.
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Invest in Technology
In a recession, the first thing that many companies cut (after marketing) are subscriptions to technological tools that actually made their jobs easier in the first place. Technology allows us to get more done in less time, and according to the law of leverage, it can help replace the cost of more expensive human labor. It’s not ideal to layoff an employee. But, if you can purchase technology that does what the employee did in half the time at half the cost? The answer is obvious.
Lesson #4 – Keep Moving Forward
Why it Matters:
The stress of living in a recession can feel paralyzing. It’s difficult to live for the future when every minute of mental energy you have is being used to get through today. However, when you live in the present and you don’t have a destination for your future, you’ll never progress. Who wants to spend the next few years living in the moment – especially the one we’re all in now?
What to Do About It:
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Suck it Up, Buttercup
In other words, you can let a recession wear you down, or you can say “It is what it is. Now, what am I going to do about it?” Recessions are a great time to learn resiliency. I practice a personal philosophy of going emotionally all-in during a stressful situation. I allow myself one day to whine, bitch, complain about how unfair life is, scream, and even have a good cry. And then I go to bed, telling myself that tomorrow I will suck it up. I will learn from the situation I’m in, and then move forward. Every single time, the next day is clearer and I can create a plan of attack.
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Invest in Your Future –
At a time when financial resources are tapped and you’re looking for places to cut money, it feels crazy to invest in marketing. And yet, this is the best time to do so. Why? Because your competition has cut their marketing, leaving less noise in the marketplace, making it easier to be seen. It’s well documented – the companies who did not cut marketing during previous recessions bounced back stronger than their competitors. The secret is to adjust your message. Sounding salesy at this time makes you look desperate and will turn off the consumer. Instead, ask the consumer how you can help (and be authentic about it!). You will engender trust and confidence in your brand.
It’s been said that the response window for a crisis is typically measured in months, while recovery is measured in years. We are just six months into the current crisis, so while you may not be able to impact your cash flow this time around, you can definitely take advantage of lessons 2, 3, and 4 to come out of this crisis stronger. The more prepared you are to act quickly, the sooner and stronger your recovery will be.
