8 mistakes companies make that slam them into a recession downfall

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Every time a recession hits, we see a wave of failing companies shuttering their doors soon after. As a business leader, you’re probably wondering what separates the losers from the winners—the companies that somehow come out of a recession stronger than before. 

More often than not, the difference boils down to eight mistakes that set companies up for a recession downfall. 

We’ll point out each mistake—and tell you what to do instead—so you can course correct your company before a recession strikes.

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1. Pushing forward without a strategy

You’d be shocked by how many companies barrel forward without a written, long-term strategic plan. This approach to business can work for a while, but eventually, without a clear direction, you’ll lose your way. 

If your plan lacks vision, clarity, and specific goals, don’t feel too bad. Meet with your management team as soon as possible and come up with clear, actionable objectives for your employees. Set deadlines for hitting each goal and follow up quarterly to ensure you’re still on track. When a recession inevitably hits, you’ll know what to prioritize and won’t give in to fear-driven impulses. 

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2. Ignoring the financial health of their major customers

When business leaders aren’t aware of the financial health of their major customers, they have no way to predict how those customers might respond during a recession. Then, not only will they be facing a recession, they might also lose their biggest customer at the same time. 

To save yourself from this shock, ask for regular updates from your clients on their pipeline of work and what they’re experiencing in the market. With this information in hand, you can predict how they might react to a recession—by restricting spending, for example—and have a worst-case contingency plan in place. These conversations can be awkward to navigate, but it’s better than getting fired!

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3. Failing to maintain enough working capital

How much working capital is enough to survive a recession?

It varies by industry, but you can start estimating your amount by accurately forecasting your line of credit and cash needs for the next twelve months. 

As a general rule, aim to have balance sheet equity totaling at least 5 to 10 percent of your next twelve months of estimated revenue. With this amount of financial flexibility, you’ll be able to survive the recession and even seize the opportunity to purchase cheap assets or talent while the prices are good.

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4. Not assembling a strong board of advisors

Companies that don’t have experienced, unbiased advisors miss out on the kind of guidance and feedback that can save a business during a recession. 

If you don’t already have one, assemble your own group of people who possess the specific talents you’re missing yourself or lacking on your team. Ideally, choose at least one person who has navigated a company through a recession and knows what to expect. 

You want honest feedback, so avoid picking people who might struggle to deliver hard truths (your family, friends, management team, banker, and lawyer shouldn’t be on your board).

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5. Missing the chance to acquire cheap assets

Remember the cheap assets we mentioned earlier? Use the money you’ve allocated to stock up while prices are low. Recessions are a wonderful time to stock up on assets, disruptive technologies, A-players (top employees), and competitors who didn’t think to plan ahead.

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6. Overshooting and betting the farm

Some business leaders go overboard, bypassing “seize the opportunity” and going straight to “bet the farm.” 

You want to take advantage of recession opportunities but only if they fit your long-term strategy. Stay within reason. Every business decision involves some level of risk, but it’s up to you to weigh those risks with the potential rewards. It goes without saying that no deal is worth losing your business over.

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7. Not diversifying revenue

Each recession plays out uniquely, with different markets affected more or less every time. By diversifying your revenue, you reduce the risk that you’ll lose a huge percentage of your revenue during the next downturn. 

It’s not enough to diversify geographically. You need to be diversified in all areas of your business, including the products and services you offer. You need an intentional strategy to manage your markets, to recognize which markets are growing, which are stable, which are in decline—and then to act accordingly.

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8. Tolerating a poor company culture

Companies with bad cultures, whether they tolerate laziness, aggression, harassment, or other sources of negativity, tend to grind through and burn out people. They struggle to gain any traction because their company structure is a revolving door. 

To improve your company culture, make sure you and your employees are aligned around the business’s core values and goals. Set standards and then stick to them. If someone has a bad attitude that’s dragging down the entire team, they need to either change quickly or go (think one to two quarters to decide, max). 

There are as many business mistakes as there are companies, but if you avoid these eight major missteps, you’ll be well positioned to dodge the company-killing blows the next recession throws your way. 

This article was written by Jonathan Slain and Paul Belair, and adapted from their book, Rock the Recession. It was syndicated by MediaFeed.org.

Image Credit: Deposit Photos.

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