Ways to prepare for a recession

Ways to prepare for a recession – a corporate governance outlook as fears mount and markets slow in the United States.

Panic kicked off on Monday when a worse-than-expected US jobs report fuelled fears of an impending recession. American stock indices dropped more than 3%. European and Asian markets also saw significant falls. In Japan, there was a dramatic drop of more than 12% on the worst day of trading since 1997.

In addition to the jobs report and a rapid jump in the US unemployment rate, the panic has also been fuelled by doubts about AI investments. Many who bet on AI having revolutionary effects on business have not seen it pay off – at least not yet – so they are unwinding their trades. 

The fallout has generated more debate than anything else: Is the US—and the rest of the world—heading for a recession? 

Analysts are divided on the issue. Some think the fears have merit; others maintain that the world economy is still robust, employment rates are still high, and markets will weather this panic much as they did during the height of COVID or the supply chain crisis in 2022. 

Still, board members and other corporate leaders will—and should—consider how resilient their company is in the face of an economic downturn. Certainty or not, preparation is everything.

A recession might come, or it might not. In any case, it never hurts to be prepared. 

Here are steps your board can take today to ensure a sudden and long-term dip in the market doesn’t blindside your company.

It is paramount to have the capital to ensure your company can stand on its own two feet during tough times. Therefore, you should be certain that your liquidity levels increase (or can quickly increase) to levels that will ensure your survival. This might involve cutting non-essential expenditures, delaying capital investments, or refinancing debt to improve cash flow.

For the same reason, it’s also advisable to diversify your revenue stream. This is always a standard measure for reducing risk, but it’s essential during threats of recession because you have less chance of falling victim to sector-specific downturns.

Get busy with the books and analyse all business areas for chances to trim costs and reduce financial waste. This might involve renegotiating supplier contracts, optimising supply chains, and leveraging technology to automate processes.

If you need to, sit down with employees and discuss the potential for more flexible management. This might include cross-training employees and flexible work arrangements to quickly adjust to changing demands without resorting to layoffs.

Ask yourself: what are your company’s key products and services, and are your efforts concentrated there? 

Modern governance can easily splinter into looking after side projects and other business expansion ideas, even if they initially underperform. This is fine in a healthy economy, but it might be better to stick to the activities you know will generate profit when a recession looms. This helps concentrate resources on areas with the highest return on investment.

Your brand and reputation can be very helpful during market downturns. Because of that, it might be a good idea to build and retain stronger trust now. Implement loyalty programs, offer flexible payment options, and commit to providing exceptional customer service to retain existing customers.

Is your board overseeing a tried-and-tested business model with no room for flexibility, or are your directors identifying and pursuing ways of adapting to a changing market? If it’s the former, you might be in trouble because your company becomes rigid as the world changes around it.

Build on your usual risk management operations by conducting detailed scenario planning exercises. This will help you understand the ramifications of different kinds of downturns and let you develop your response ahead of time.

When a crisis occurs, a lack of communication is the one thing that will anger and dissuade stakeholders from being confident in your leadership. 

You need to keep all channels open at all times and with all stakeholder groups—from shareholders to employees to the communities you work in. Ensure updates are regular and to the point. This is what people want to see.

The “will it/won’t it” nature of a potential recession can often be at the forefront of directors’ minds, mainly as they follow the story in the chaotic, daily news cycle. 

But beneath the speculation lie important duties of preparation. Boards must be confident that if a recession were to take hold, their company would have the structures in place to lessen the risk and ensure the business remained healthy and functioning. 

Ways to prepare for a recession