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How to Build A Recession Proof Business

May 15, 2020
This guide gives you four valuable lessons that you can apply to your own business and make it sure you come out the other side of this pandemic. These are lessons learnt from businesses that have made it through one or more previous recessions and gone onto thrive.

Country’s all over the world are going to be slipping into recession as the effect of the coronavirus begins to take hold.

Businesses have been forced to close in response to the virus, and entire industries have been lain flat (events).

The effect on your country’s economy is going to be material. Many will go into a recession. Leaner times are certain.

One question sits on a lot of business-owner’s lips: How do I stop my business from shutting its doors?

This guide gives you four valuable lessons that you can apply to your own business and make it sure you come out the other side of this pandemic. These are lessons learnt from businesses that have made it through one or more previous recessions and gone onto thrive.

Ready to take back control? Grab a notepad and let’s get to it.

1: Diversify Your Income

From Diversification Reconsidered by Peter Frumkin and Elizabeth K. Keating:

“Business and non-profit researchers have long argued that by establishing and maintaining multiple streams of funding… organizations are able to avoid excessive dependence on any single revenue source, stabilize their financial positions, and thereby reduce the risk of financial crises.”

The 80/20 rule or Pareto Principle has long been touted as a great way to focus your efforts in order to generate the most income.

If you’re unfamiliar with it, it goes something like this: 20% of your efforts lead to 80% of the outcomes. It’s a phenomenon that’s been found to apply to quite a few situations in the real world.

In business, founders and growth execs flaunt it as the be-all-and-end-all of generating revenue. If you focus most of your time on the 20% that generates 80% of your income, you’ll naturally grow your revenue.

This might lead to a total collapse of your business when shit hits the fan — as it has.

If you’re relying on the majority of your income from one source, and that source disappears, you’re going to be looking down into a deep dark hole of very little revenue. A deep dark hole isn’t a great source of cash when salaries need to be paid.

Case Study

Applicably, a lesson can be learned here from Sam Parr at The Hustle.

The Hustle started as a newsletter, with the offering of “bold business and tech news”. As a long time subscriber, I can confirm they do just that. The Hustle has over a million newsletter subscribers and generates revenue (though not exclusively) through paid advertisements.

Soon after starting the newsletter, the Hustle started The Hustle Con. It’s a conference for hustlers where they can hear entrepreneurs from around the world telling their business stories. 2019 tickets ranged from $300 for one day to $2500 for VIP access. In 2018, there were reportedly 2000 attendees. Let’s estimate an average ticket price of $400, that’s $800 000 for a weekend-long event.

To diversify even further, Sam started a niche community for highly motivated individuals wanting to start and run businesses. I was one of the first subscribers and have never been part of a more valuable group of people.

It’s called Trends and is a paid newsletter and community of entrepreneurs and founders. The Facebook group is a goldmine of connections and resources.

The Trends landing page

Currently, the Facebook group stands at 4.7k members. The monthly subscription is $299 USD. It hasn’t always been that price, so let’s say each user pays on average $200 USD, that’s almost $1 000 000 every month.

Through clever diversification of income streams, Sam has managed to set his business up well.

Imagine The Hustle Con was their only source of revenue? Wouldn’t be sitting so pretty in today’s current COVID-19 situation.

The case study above emphasized the importance of diversifying your business and generating multiple streams of revenue. By doing this, you’re safeguarding yourself against any impending uncertainties as we’ve experienced in the last few months.

2: Know When to Pivot

Diversifying is all good and well, but sometimes that’s not possible, or all your income streams are simply wiped out by something that’s out of your control.

That’s when it’s time to pivot.

You may have seen a list of the fastest-growing (and declining) eCommerce categories going around recently. These are the sorts of trends you need to stay on top of.

If —  as an example — you’re operating a successful eCommerce store selling high-end DTC men’s health care goods, you would have built a bunch of assets, knowledge and intellectual property which allows you to run your company. Some examples would include:

  • Logistics partner
  • Brand equity
  • Packaging process
  • Customer base (email/phone number list)
  • Fulfillment process
  • Website

All of these mean you are equipped to run a successful online business, and that’s the key.

Look at the assets of your business. How can these be re-purposed to pivot to another successful category

Case Study

One of the oldest corporations alive today is Nokia. They’ve been around since 1865.

The reason they’ve managed to survive for so long is that they’ve been excellent at following the money.

The original Nokia company — called Nokia Ab — was founded as a ground-wood pulp mill. For this, they required a source of power. At the time, a river was the best perpetual source of energy.

This naturally leads to them becoming interested in electricity as a business. Under a new chairman, this arm of the business started in the early 1900s.

By the time the 1960s came around the company merged with two others. The amalgamation of companies was now producing paper items, rubber products, and telephonic and electrical cables.

Part of this corporation was a small research and development division that was focused on what would later become the early stages of mobile phone technology. They were the pioneers of the industry.

Development of Nokia mobile phones over the years. Source: Wikipedia

The rest of the story is history, as Nokia led the way in mobile phone technology and were responsible for a large majority of the early-stage infrastructure and technology which has given rise to our smart-phone enabled world.

Nokia has shown us how if you are able to identify how you can re-purpose your skills, expertise, and assets effectively, you can pivot your business model to follow where the demand is going.

Where there is demand, there is money. Where there’s money, you’ve got a viable business.

Don’t hang onto the pipe-dream that was your business. If you start seeing signals that things are going pear-shaped, take a step back for some perspective and do an analysis of your company and the market.

Is there a future for you here?

Where are your strengths and weaknesses?

Where are your big dependencies?

Where is the market moving?

When you’ve truthfully answered all those questions you’ll be in a more informed position to make the decisions that could keep your company alive.

3: Operate Lean

When there’s money going around, its easy to become wasteful. At the time, it doesn’t seem wasteful either. What is a few thousand dollars here and there for entertainment?

One of the things I have learnt from Ray Dalio (founder of Bridgewater Investments — the largest hedge-fund firm in the world), is that history always repeats itself. And we should be learning from those patterns.

One of the patterns he has identified is the coming and going of economic cycles. The just of it is that the world (and countries) go through cycles of being cash-flush and then (normally quite suddenly) not. What follows is a slow and steady recovery followed by a bull-market and so the cycle continues.

It is valuable to recognize where we are in one of these cycles so that we can prepare, but it is even more valuable to build a business that can operate through these cycles. One of the key factors for this, is the ability to operate lean.

Operating lean means that you trim away the fat. You focus on what drives your company forward — what’s creating value for your customers — and then trim away the parts of your business that are not contributing to that success.

What does that look like? Toyota has some insights for us. Let’s jump in.

The Toyota Production System. Source: Researchgate.net

Case Study

The founders of lean production were the Japanese. Toyota — specifically.

In order to increase their efficiency, Toyota developed a new method for running their company — the Toyota Production System (TPS). Part of the TPS was just-in-time and Jidoka methodology.

Without going into the details, these principals were based on the thinking that to keep a manufacturing plant as efficient as possible, everything should be ready just in time, using processes that are as automated as possible (jidoka).

This system has been used around the world since its first conceptualization in 1948.

So how to use the Toyota Production System in business?

The foundation of the TPS is that the right processes will produce the requisite results. These are the 7 processes that the TPS employs:

  1. Reduced setup times;
  2. Small-lot production;
  3. Employee involvement and empowerment;
  4. Quality at the source;
  5. Equipment maintenance;
  6. Pull production;
  7. Supplier involvement.

These are analogous to these lessons you can use for your business:

Lesson 1: Eliminate non-value-adding activities/tasks.

Setup time is something that doesn’t directly add value to the final supply chain. It’s a necessity (to set the machine up), but doesn’t create anything. Identify those tasks in your business which are the same.

Eliminate them ruthlessly.

Lesson 2: Complete projects in batches

By undertaking massive projects head on, without breaking them up into small, clearly defined tasks and outcomes, you risk losing all that work.

Consider a scenario where a client gives you an initial brief which you think you understand. Instead of delivering intermediate deliverables for approval along the way, you decide to tackle the whole project and deliver the final product after weeks of work. The client rejects it — it isn’t aligned with his vision.

Had you implemented batching, and delivered intermediate pieces of work, you could have corrected course early on and not wasted resources on a task which isn’t required.

Lesson 3: Your employee’s are your business

Customer comes first, right?

Wrong. Employee’s first.

Happy employee’s mean happy customers. It’s been said time and again. Take care of your employee’s, invest in them, and they’ll want to (or even feel obliged to) do great work for you.

Lesson 4: Quality inputs for quality outputs

If you want your business to create value for customers, you need good people and good tools. You can’t expect mediocre skills to produce outstanding work.

Hire the right people for the job, even if they cost more.

Lesson 5: Keep a finger on the pulse

As your business grows, it naturally takes on more of silo-ed organizational structure. When this happens, you risk losing touch with the grassroots goings-on which keep your business ticking.

Set aside time periodically to go back to the foundation of your business and assess the situation.

Has your original ethos been skewed or are you maintaining the same standard of work as when you were running this department directly?

Lesson 6: Intra-organizational flow

Inline with the point above, the way information and tasks run through your company is hugely important. Silo-ed ‘teams’ completing the work they’re good at is great, but without efficient communication between silo’s information can get lost in translation.

Spending time working on the way teams and departments connect with each-other is important. Where is there overlap in the work being done? Is there an opportunity for improved synergy somewhere?

Imagine your organization like a combination of roads and highways. At the end of each are outcomes that are required (revenue driving deliverables). You need to plan the roads and highways effectively so that there are no two pathways that are operating in parallel. Those are wasted resources.

Lesson 7: Look upstream and downstream

Your employee’s are the not the only processes you need to control.
Take stock of the inputs and outputs upstream and downstream of your business.

Are there suppliers that continously hold of production? Are there demanding customers that are always asking for products at the last minute and paying late?

These processes affect how your business operates. Identify the troublesome areas and improve them.

To be cash efficient you need to operate lean. Operating lean means you’ll have the opportunity to put cash away for when times get tight — and they always will. It’s called building a cash moat.

4: Build a Cash Moat

Cash is king.

You’ve heard it before. During difficult times, the saying rings true more than ever.

Cash reserves keep your business operating. It keeps your skills in-house and salaries paid.

So, how to build up a cash moat?

Step 1: Manage your cash cycle

Perhaps the most important metric in managing your cash flow through your business is your cash conversion cycle (CCC). It is effectively a number (in days) of how quickly your business converts its investment in stock and other resources which generate revenue (goods to be sold) to cash in the bank.

Amazon are masters at this. Here’s more.

The metrics you have to consider here are:

  1. How much time it takes to sell inventory
  2. How much time it takes to collect receivables
  3. How much time it has to pay back outstanding debt without penalties

So CCC = Days of inventory yet to be sold + Days sales yet to be collected-Days payables yet to be paid

Here are some examples to consider:

  • Macy’s CCC is 71 days
  • Wal-Mart’s CCC is 12 days
  • Costco’s CCC is 4 days
  • Amazon’s CCC is negative 24 days

That means on average Amazon is getting paid by their customers 24 days before they have to pay their suppliers. They’ve essentially got 24 days of free capital to use how they please.

Amazon’s Cash Conversion Cycle. Source: FourWeekMBA.com

That is part of the reason Amazon has grown so rapidly. It has effectively used its customers cash to fund its expansion.

So using those three metrics, here are three ways to improve your cash conversion cycle and fund your business operations and growth organically:

  1. Reduce the amount of time you hold idle stock. Move inventory quickly.
  2. Get paid quickly. If your business model is not to collect payment immediately (through a card transaction for example), then offer incentives for paying early.
  3. Negotiate payment terms with suppliers. By always paying on time and being on good terms with your suppliers, you may be able to get favourable payment terms. It never hurts to ask.

Clearly, by effectively managing your cash conversion cycle, you’ll set your business up for not incurring an excessive amount of debt and being able to bootstrap your growth.

Step 2: Budget effectively

An essential step in managing your company’s cash position is knowing when to expect money to be coming in and leaving your business.

This is achieved by proper forecasting.

Here are some things to consider when doing your forecasting:

  • New employee’s required
  • Bonuses
  • Asset purchases — should we lease or buy?
  • Demand surges
  • Payment terms on invoices
  • Withdrawals

By budgeting effectively, you’ll know when it’s a good time to be putting cash into a savings account and when to stay liquid. That way, you’ll avoid any penalties related to late payment or early withdrawals.

Step 3: Invest intelligently

Growing your business is the number one goal of any founder.

This can happen in many different ways, but two of the most popular include:

  1. Expanding into new industries, or
  2. Buying into new businesses that compliment yours.

Both of these are ways to increase revenue generating streams. There are however considerations to be made when you’re considering growth.

  • What is the cash position of the investment?
  • Does the investment require capital injection?
  • What is the cash conversion cycle of the investment?
  • Is it possible to delay payment for the investment upon reaching a certain target, or pay in installments?
  • What is the resource requirement for the investment?
  • How liquid is the investment if you need to dissolve it?

By investing your money intelligently, you can improve your businesses cash position and make sure that if things turn bad, you’re still covered.

In the world of business, you can be sure of two things:

  1. There will be good times, and there will be bad times.
  2. Neither of them will last.

Prepare your business for both eventualities, so you can ride economic cycles effectively and capitalize on opportunities as they are available.

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