Planning for recession is essential. As a CEO/founder it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.
What is a recession?
The National Bureau of Economic Research (NBER) defines an economic recession as “a significant decline in economic activity lasting more than a few months.” A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough — between the two lies the period of recession. In the United States, a recession is generally considered to be two consecutive quarters of decline in real GDP.
During a recession, businesses experience reduced demand for their products and services, leading to layoffs and decreased production. Consumers also cut back on spending, which further reduces economic activity. While recessions are often associated with falling stock prices and increased unemployment, they can also lead to positive outcomes, such as lower interest rates and an uptick in housing market activity. Ultimately, recessions are a natural part of the business cycle and can provide opportunities for growth in the long run.
What are the warning signs of an impending recession?
Recessions are caused by a variety of factors, including tight monetary policies, high interest rates, and financial bubbles reaching their breaking point. They are typically accompanied by declining stock prices, rising unemployment, and falling consumer confidence.
In both 2001 and 2008, stock market crashes led to a “dead cat bounce,” i.e., temporary recovery in share prices after a substantial fall. This data suggests that the stock market crash from earlier in 2022 may lead to a similar outcome, with the biggest takeaway being that just because the market is up at the current moment does not mean that we aren’t in a recession.
In order to ensure long-term success, it’s critical to keep an eye on a number of key indicators as the market shifts. At Rooled, we advise clients to be cognizant of the current environment by taking note of occurrences such as:
- Stock market crash
- Recessionary headline news
- Venture funding slowing down
- Decreased consumer confidence
- Yield curve inversion
- Decline in real income
- Any communication from your investors regarding a potential market downturn
What does a recession mean for my company?
A recession can have a significant impact on businesses of all sizes and at all stages. Many consumers cut back on their spending during a recession, which leads to lower sales and profits for businesses. From the business side, operations will need to be reevaluated and shifted accordingly. As a result, recessions can lead to layoffs, reduced investment, and lower growth.
The pullback on investing and venture capital funding can be demonstrated by Silicon Valley Bank, which noticed that in Q1 of 2022 investments remained strong, but that a focus on pre-seed and seed funding developed in the second quarter as higher-level investment activity declined.
While a recession can have a negative impact on businesses, it is important to remember that not all companies will be equally affected. For example, companies that are more geared towards luxury goods and services may see a decrease in demand during a recession, while companies that provide essential goods and services may see an increase in demand.
There are also opportunities that can arise during a recession. Outsourcing is often seen as a way to save money and reduce headcount. However, outsourcing can also help a business weather the storm of a recession by increasing efficiency and accessing new markets or talent that may otherwise be out of reach. During a recession, businesses need to be leaner and more agile to survive and outsourcing can keep essential functions moving while freeing up your internal staff to focus on core competencies and strategic initiatives.
How do I navigate my business through a recession?
Recessions are normal. They don’t last forever. While they can be painful, recessions also open the door to a lot of potential opportunities. We’ve laid out the following five crucial actions to take when preparing yourself and your business for an impending recession.
- Control your burn
- Model worst-case scenarios
- Define trigger points
- Communicate to shareholders
- Gain market share
It is important to remember that recessions are typically temporary economic downturns, so businesses that can weather the storm and maintain their customer base will often see an uptick in growth once the recession ends.