IAN MANN REVIEWS: How to rock a recession | Fin24
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IAN MANN REVIEWS: How to rock a recession

Oct 27 2019 07:40
Ian Mann

Rock the Recession: How Successful Leaders Prepare for, Thrive During, and Create Wealth After Downturns. By Jonathan Slain and Paul Belair

The authors, like everyone in business, bar neophytes, and then only in some countries, have been through a recession. And will again and again.  

A recession, in the context referred to in this review, is "any big shock to a company’s system. When your key vendor or key supplier cuts you off, you’re in a recession. When your partner embezzles from you, you—my friend—are in a recession!" the authors explain.

Everyone in business, goes through this "recession" experience in one form or another. That is pretty much guaranteed, but guidance in the preparation for your next recession does not exist, the authors assert, and so they wrote this book. (Peter Navarro wrote a book on this topic,The Well-Timed Strategy: Managing the Business Cycle for Competitive Advantage, that I reviewed in 2006. Navarro’s book was more theoretical than practical whereas this book is very practical.)

The foundation idea is that you must lead and upgrade the management of your business well before the recession hits. This will not guarantee that you will not feel the shock, but at least you will be well positioned to survive, and better still, thrive in a recession.  

Being robust

Unprepared you will probably curl into a foetal posture, and discombobulated, hold the position until it is over, or your business is.

Once you have worked through this book, you will agree that recession planning should be considered as part of your basic business hygiene. The prize is that if you get this planning right, you will be calmly guided by a well thought-through plan to protect - at very least - the company’s functioning capacity.

At best, you will reap the advantages of being counter-cyclical. Being financially robust and operationally sound, you will be able to buy at an attractive price, a competitor or a complementary business that has not prepared for the recession. You will be able to hire newly available talent at good rates. You will be able to market and advertise when others are cutting back and advertising is cheap. And so on.

During a downturn many are scurrying around aimlessly with no plan for surviving, let alone thriving. The goal of this book is to prepare you to be able to grow and benefit during a recession. To do this, the authors have identified 20 "recession readiness questions". I will share some below that give a clear indication of the process.

The initial questions are designed to give you a solid understanding of your current position, and then to indicate what you will need to achieve. "You must have a written plan in place. And you must understand where you are now."

So, the first recession-readiness question is "Does your company have a written action plan for the next recession or major shock to your company’s system (e.g., losing your biggest customer)? The operative phrase is ‘a written action plan’ carefully thought through when you are not in crisis.

The second is: Does your company’s leadership team understand and track basic economic indicators? Your industry and location will determine what needs to be tracked. Not knowing what you don’t know, is the most dangerous position of all. If there is no insider who fits this role, that need not be a problem if you can identify someone who has their finger on the pulse of the economy who you can follow to avoid being blindsided.

Against this background, collect your current financial statements, and review your history over the last few years. "You’d be surprised by how many owners don’t know this number or range, which is why they never take the steps necessary to dramatically increase their company’s value," the authors note.

Additionally, your company’s leadership team must understand the financial health of its major customers and vendors.

Compile a list of your top twenty customers together with your best estimate of their turnover, gross margin, and net profit, as well as the same information for your most important suppliers. To endure a recession well requires increasing operational efficiency, developing new markets, and enlarging your asset base. This information will be very helpful.

Operational strength

To understand your own operational strength, it is prudent to assess whether your company’s EBITDA margin is ‘best in class’ for your industry. This measure is a way to evaluate the company's performance alone, without having to factor in financing, accounting or tax decisions. (If this is not clear, some financial education may be necessary for the leadership!)

Does your company’s leadership team regularly meet with its bank? Is the company’s line of credit right for current and future business needs? Waiting for your bank to contact you because you are in breach of some financial arrangement is very poor practice. When you do need the bank, that will count against you.

Does your company have cash or debt available to fund growth? Squirrels have a biological imperative to gather nuts for winter; leaders don’t.

"Does your leadership team spend at least one day each quarter on strategic planning, including updating your recession plan and doing a gap analysis of the talent, products, services, and geographical presence you lack?" This is not to be confused with your regular management meetings, where you assess recent performance. This is a strategic meeting, and thinking strategically cannot be left to the annual getaway.  

Warren Buffett said that when the tide goes out, you can see who’s been swimming naked. If you’ve been working without a strategic plan, you are swimming naked.

Does your company’s leadership team have an accurate method of tracking its backlog, its current work in progress, and its pipeline of potential new work? Unless it includes an assessment of what was supposed to happen, what actually happened, and then, what explains the difference between these questions, you have achieved nothing. Only with this background can you design what you should or should not do in the future.

Is your company’s revenue diversified? Do you serve some market sectors that are countercyclical or unaffected by recessions? This must be part of your recession plan. You need to make every effort to correct or mitigate this factor.

The final recession plan which includes much beyond what is written above, must include a tiered plan of action when the recession hits. The first tier may well be to cut all discretionary spending: perks, travel, subscriptions, etc. The second might entail far more drastic issues, such as retrenching non-essential staff. When the time comes and you have to invoke tier two, it is definitely not the time to consider who or what positions are non-essential. At this stage you are not calm or clear – fear and threat will see to that. You need to consider these matters in advance, which is why you plan for a recession long in advance. The third tier is letting go of talent.

On the positive side, your recession plan should have clear criteria and processes for which companies or assets to target for acquisition. This will prevent you from making bad decisions rapidly when good decisions could have been pre-planned.

If your business is not currently in a position of strength, you can still get to a position of strength before the next recession - if you have the right plan.

To reiterate: A recession plan is a written document with planned action items. It’s created before it’s needed, not when it is needed. It’s hard to read the label when you’re inside the jar.

Readability         Light --+-- Serious

Insights              High -+--- Low

Practical              High +---- Low

*Ian Mann of Gateways consults internationally on strategy and implementation and is the author of ‘Strategy that Works’ and ‘The Executive Update.’ Views expressed are his own.

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