Preparing for a Good or Bad Economy

By Diane M. Calabrese / Published February 2020

If only…Nothing sums up regret like those two words.

Although it’s impossible to plan for every contingency, it is not impossible to plan. Buoyed by a thriving economy, no one—except perhaps the most novice business owner—expects the vigor to be sustained without interruption.

Planning for the good, the bad, and the in-between is essential. “Sudden downturns do happen occasionally,” says Jerry Meyer, vice president at Ben’s Cleaner Sales in Seattle, WA. “The most recent unexpected downturn of 2008 was one that was not expected for us.”

Indeed, all appeared just the opposite, explains Meyer. “We were having one of our best years, when suddenly in late September sales declined dramatically, and the phones stopped ringing. We had to make quick adjustments and hard decisions.”

The necessary modifications affected all parts of the business. “We adjusted our spending, froze wages, and had to use our reserves to keep everything covered,” says Meyer.

Preparation is key whichever direction the economy takes. “I think being prepared is important in a good or bad economy,” says Meyer. “Having resources and reserves to get you through a bad economy or to be used to expand in a good economy is important.”

Tap-ready reserves encompass financial ones and more. “Money in reserves, good credit to borrow, and good relationships with vendors and customers are all essential to get through whatever economy is ahead,” says Meyer.

“Vendor relationships are extremely important,” explains Meyer. “Having support and understanding when times are tough and when times are good…I have high regard for all our primary vendors that stand with us even when times are tough. Customer relationships are equally important.”

Bonds built between businesses and customers can keep both strong. “Having loyal customers is everything,” says Meyer. “Loyal ones that stick with you and continue to purchase from you in good and bad times provide a solid base to your success at any time.”

Flexibility in outlook should be cultivated, too. Create the stores needed for difficult times during good times. (It’s analogous to storing food and fuel for winter survival in earlier eras.)

“Keeping track of your expenses and having money in reserve to get you through the downturn” begins the process of responding to a perturbation, explains Meyer. “Good bank relationships are also important so you can get or keep a line of credit as a safety net.”

Then there are alternative markets. “In a bad economy, it’s also important to know your local market and customer base,” says Meyer. “Even in a bad economy, certain markets or customers may still be spending money. County, city, and other government entities are still using their budgets and, in at least the short term, are unaffected by the private sector.”

Diversification in sales helps make the switch to alternative niches easier to do quickly. Until it’s possible to have exceedingly reliable indicators of the way the economy will unfold, it may prove to be the strongest lifeline of all.

“I think it’s sometimes difficult to predict a good or bad economy ahead of time,” says Meyer. “There are the obvious indicators, like the stock market or what large businesses are doing. But that doesn’t always reflect your local economy.”

Locales may deviate from the national profile. “Sometimes the local economy may be booming because of local factors unrelated to the economy as the whole,” says Meyer.

“Sometimes Seattle’s economy can do well because of its diversity,” explains Meyer. “We are not primarily dependent on one source for sales. Seattle has diverse markets—i.e., high tech, fishing, construction, aerospace, and others—so we are not dependent on just one industry to support the local economy as a whole.”

Deliberate Approach

The economy may suffer a reversal, or it may keep growing. Preparation differs with each sector, but the broad parameters are the same. They begin with a foundation of flexibility.

In a downturn, a distributor must look for new niches to serve. A manufacturer must be ready to switch the focus of production. A contractor must be open to providing services to different types of customers, such as moving from a residential focus only to commercial or government clients.

“It’s very important to make sure you have contingency plans in place,” says Doug Rucker, owner, Clean and Green Solutions in Porter, TX. “Then know when to act on those plans.”

Owners may be concerned about the retreat of the economy, but they should be as ready to act when the economy is strong and strengthening. “So-called economists are not always ahead of the game in predicting or warning us of a downturn ahead, so you must prepare your company and be ready to take action, sometimes at a moment’s notice,” says Rucker.

The future is unknowable. There are trends and indicators. Thus, although it is “not impossible, it can be very hard,” says Rucker.

“Paying close attention to clients’ buying decisions and RFP [request for proposal] frequencies can yield good indications,” explains Rucker. “Paying close attention to other industries and companies will also help.”

The monitoring and assessment of the information that surrounds a business owner every day is, in other words, a very good predictor of what’s happening. It’s much like taking a walk every morning, getting to know the feel of the air, and being able to realize that Doppler and meteorologists can be very wrong.

“Never rely on the so-called economy experts to warn you,” says Rucker. “Often, that’s too late. The years 2008 to 2010 would be a great example of a good economy, and then all of a sudden, bam—and the downturn lasted longer than usual as well.”

If the economy suddenly falters, a business should be able to sustain itself long enough to adjust. Savings are important, says Rucker, because they enable an owner to maintain cash flow and provide the ability to control operating expenses.

Although generous payment terms may be possible in a good economy, a pull back from the terms may be necessary in a slow economy. “Be prepared to change the terms of payment, as needed, from extended terms like 30, 60, or 90 days, to collecting before service is done or inventory is shipped,” says Rucker. “Be prepared and monitor billables, and adjusting credit limits may be necessary.”

Two-Directional Opportunity

When the economy is booming, there are those tempted to chase every rainbow. So many sectors may be thriving that getting involved in as many as possible may seem like a good idea. Yet there are costs associated with a decision to expand into new markets, and they should be considered thoroughly.

A scattershot approach to markets is unlikely to be a hedge against future downturns. Much more likely it will be a path to chaos, making it quite difficult to provide quality products or service to disparate customers.

Recommendations from business experts typically focus on opportunities to reduce costs in a downturn. They include taking a tough approach to collections and re-evaluating any capital purchase. The recommendations actually should be just as useful when economic activity is soaring.

Taking the tips for readiness in responding to a downturn and applying them in good times can bolster reserves and cash flow, as well as prevent an owner from making a less-than-prudent capital expenditure. As one publication from the U.S. Small Business Administration puts it, being able to separate the would-be-nice from the must-have expenditures can help hold a business together during shaky economic times. The same discretion boosts a business in good times.

By building a good relationship with a banker or creditor during good times, a business owner will have a creditor better able to understand his or her financial situation when the economy sours. That does not mean creditors will want to extend more credit. And even if they do, it may not be the best time for a business owner to take on more debt.

A good relationship with employees may allow owners to ask for an across-the-board pay cut to prevent layoffs in a downturn. But that’s a tricky one, and internal goodwill may be superseded by employment regulators.

Whichever way the economy goes, the owners that will be best prepared are those known for quality and durability of products and/or services, as well as competent and genial employees. Employee training should continue in every economic climate.

The economy is dynamic and multi-dimensional. The up and down trajectory is a fluid path. New markets continue to emerge, and existing markets continue to change. The worst downturns happen when a collective psychology takes hold that things are bad—and they may not be good for a long time. Such collective thought can immobilize business owners. Creativity in marketing, looking for opportunities, reorganizing, etc., can counter that negativity. And it should in less-than-good times and every day.