Inflation is the highest it's been in decades, and that has businesses and consumers worried about an impending recession. Recessions can wreak havoc on a business, and while your organization likely has a plan for everything from natural disasters to cybersecurity, it’s important to have a GRC plan in place to manage recession risk, too.
What is Recession Risk?
A recession is a consistent decline in macroeconomic performance, typically for two consecutive financial quarters. While it’s easy to panic at the first sign of a recession, it’s a natural part of any economy. Economies expand and contract, and a contraction is necessary long-term for growth.
We can’t predict how long or severe a recession will be until it arrives. Some are mild, while others, like The Great Recession, are devastating. This means organizations should prepare for the worst while hoping for the best.
You can’t control the severity of a recession and even the most “recession-proof” businesses will feel the sting from one. But you can control how your business reacts to it through recession risk management. Recession risk management involves identifying recession-related risks, taking steps to mitigate them, and monitoring those risks over time.
Even the most “recession-proof” business is at risk of the adverse effects of the economy. But with recession risk management, your team comes up with strategies to weather an economic downturn. Good recession risk management ensures an organization is equipped to:
Increase consumer confidence
Maintain cash reserves
4 Strategies to Proactively Manage Recession Risk
Bloomberg estimates that the U.S. economy will almost certainly experience a recession within the next 12 months. Instead of allowing this economic change to take you by surprise, your business can take steps right now to manage recession risk before things become dire.
1. Create a recession management committee
A recession management committee isn’t just a delegation that meets one time to talk about the recession. This is a dynamic group that should meet at least once a month, and more frequently in times of crisis. During their meetings, the committee will look at macroeconomic factors and the company’s financial performance to suggest the next steps. If the economy worsens, your recession risk committee can help your business adjust its course.
Don’t silo this committee within a single team, like HR or accounting. Create a cross-functional recession risk coalition that pulls in representatives from every department. Make sure a member of your GRC team is on the committee to help prepare for cybersecurity and risk changes. This ensures you’ll have a complete view of what’s going on in the business and a variety of opinions and ideas about how recession policies affect the business to take into account.
2. Reduce spending
Now is the time to tighten the purse strings. The less money you spend, the more cash you can keep for a rainy day. Ask your recession risk management committee to devise reasonable cost-cutting measures that won’t sacrifice quality or productivity.
Holding as many remote meetings as possible to cut down on travel costs
Switching away from consumables, like styrofoam cups, for reusable options
Opting for efficient utilities like LED lights, low-flow toilets, and smart thermostats
Embracing a hybrid or remote work model to minimize the need for office space and the related overhead.
3. Optimize your labor and vendor resources
If none of the above cost-saving measures work and you need to tighten the purse strings even further to ensure business continuity, it may be time to consider layoffs.
This is an extremely difficult decision, and should be used as a last resort. Nobody wants to see layoffs, but they can be an essential, if drastic, tool for recession risk management. After all, full-time employees are one of the biggest expenses in your organization.
However, layoffs come at a terrible cost. They can destroy morale and leave dozens — even hundreds — of employees without work or income. If you do need to conduct layoffs, ensure you’re following best practices for making sure employees are not caught off guard and insulating your business from any associated risks.
Before turning to layoffs, you should also reconsider your vendor relationships to save money. Sometimes it’s less expensive to outsource, while other times it’s more efficient to do everything in-house. Do the math to see which scenario makes more sense for your business.
4. Diversify revenue sources
The vendor ax can cut both ways however, so now is the time to diversify your offerings to ensure all of your eggs aren’t in one — possibly vulnerable — basket.
Do you make most of your revenue from one product or service? If so, you have a greater degree of recession risk in your business. If customers decide that your primary offering isn’t a necessity during a recession, you’ll see devastating financial losses.
For example, if you offer services, consider rolling out an affordable product that you can sell with less effort. Some organizations switch to a monthly subscription model so they earn more predictable recurring revenue, too.
Manage your recession risk now
The best way to prepare for a recession is to bake efficiency into your business well before one arrives. And when it’s clear there will likely be a recession soon, start taking smart cost-cutting measures to build your cash reserves. While the economy will naturally expand and contract over time, your business needs to take evasive action before the worst of the recession arrives.