Here we are again on the brink of another recession.
It’s all so familiar. The media is full of doom and gloom. The Bank of England’s forecasts have been bleak. Inflation is out of control. Putin’s war is destabilising markets with no end in sight. The UK is likely to fare worse than other western economies – so much for the ‘Brexit dividend’. What a sorry state we find ourselves in.
Yet, I believe recessions provide opportunities for fast-growing companies with energy and conviction. And I’m not just saying that. It’s my experience. In only five years, I’ve scaled two UK businesses from zero revenue to £30 million. Both were during recessions.
There are things that you should be doing right now. At the very least, they will recession-proof your business. But at best, they could help you push ahead of your competition. You may come out of the next recession in a stronger position than where you started.
So, what should you do now as CEO of a business that’s steering into these choppy waters?
When we rolled into the COVID pandemic, we advised our clients they needed cash in the bank. How much depends on your perception of risk. It should be enough to cover a minimum of three months’ operating expenses. We advise six. Bill Gates used to run Microsoft with 12 months’ cash in the bank.
Back in April 2020, as COVID hit, I interviewed Jack Stack, author of ‘Great Game of Business’ for my Melting Pot podcast. He told me the pandemic was his 7th Black Swan event. “When we do our business plans,” he told me, “we say, OK. There’s something out there we can’t even figure out. So let’s set money aside for the most catastrophic event you can imagine. In ‘09, we put together a long-term plan to raise $100 million in cash for the next Black Swan.” And every time they hit a recession, they doubled the company in the next five years.
One of our clients, Artemis, almost lost everything in the 2008 crash. Since then, they’ve always run their business with at least six months of operating expenses in the bank. They never want to be in that position again.
There are specific levers you can pull to recession-proof your business. One of these is positioning. This comes down to one thing, and one thing only. It is knowing your core customer. So many of our blogs focus on this for a reason. It’s fundamental. Who are the customers that will buy from you at the maximum profit, and what is the problem that you can solve for them better than anyone else?
Have you defined your marketplace tightly enough to have only ten to twenty competitors globally? That might mean as few as 2000 prospects. If this isn’t the case, you’ve got work to do.
Pricing always makes companies nervous. When we suggest our clients put their prices up, they start twitching. There’s that nagging feeling, ‘We can’t do that. Not now. It’s going to make us uncompetitive’.
Instead of hiking up the price in one big hit, have you thought about small increments? This was our advice to New Signature, one of our clients struggling with profitability. After some persuasion, they went ahead and, you know what? Nobody noticed. Twelve months on, they had a substantial boost to their profit margin.
Maybe you look at your portfolio and decide to raise prices on some things, not others. There may be areas where you can be more aggressive – new products or customers, for example. But get used to the idea of raising your prices now. Because with inflation heading towards 13%, you can’t afford not to.
Returning to that conversation with Jack Stack, he advocated financial literacy throughout a business, regardless of role. He uses an open-book management approach to make financial instruments personal, giving people a stake in the company and getting them to own elements of the income statement and P&L.
We like this idea. Instead of being the preserve of the CFO and CEO, dole out responsibility for the P&L sheet. Go through it line by line and assign a member of your Executive team to each item. They are then accountable for those costs, going through them with a fine tooth comb. Make this your primary focus as a team. You want to maximise value from every penny that you spend.
Do you know who your most profitable customers are? It staggers me how many CEOs don’t. It’s a pretty straightforward calculation. Let’s say you’re a support organisation. Take the total cost of salaries servicing the customer by the number of tickets they handle. You’ll get a cost per ticket. And you’ll be able to rank your customers accordingly. Look at the top 10 and see which customers use more support than they pay monthly.
My experience is that there’s often a mismatch between the customer’s expectations of the service they want and your expectations of what you’re delivering. For the less profitable customers, you need to tell them you will have to put their prices up. Get clear on your contract by tightening up your specification of the support tickets they’re allowed to open. Alternatively, give them training or get them to buy some training. Expectation setting is vital to avoid the creep of doing more and more for the same money. This is only likely to get worse during a recession.
It’s interesting. You’ll find the customers more demanding of support often don’t like you. And even more interesting, your staff probably won’t like them much either. In the worst cases, it might be time to say goodbye.
You may be struggling to hire staff. Why make this worse? You don’t need to be bigger for the sake of being bigger. Perhaps now is the time to grow slower but with a more solid base of customers who value your service. If your unprofitable customers have no upside potential, fire them instead of trying to hire that extra person.
In times of crisis, it’s vital to have good financial reporting in place. Do you have a cash flow forecast? How many ‘days to death’ have you left? What’s the bank balance, and are you comfortable with enough reserves?
It might be prudent to put your business on a war footing. Your Finance team need to get good at giving regular, direct forecasts. Their measure of success is not that they’re doing this but that what they’re reporting is accurate and useful. Get laser-focused on maintaining your business at the current level and not letting it slip backwards.
This is not a time for breadth. It’s a time to focus. When business starts to contract, it’s even more important to be a specialist doing something differently from everyone else. Then you’re more likely to maintain your revenue. Companies that don’t know what they represent are more likely to lose out.
Make sure Sales are clear on your value proposition. How can they show new core customers that they will get a 10x return from investing in your business? Remember, at times of crisis, there is a flight to quality. You will thrive if you’re the best in the world at what you do.
I was talking to a director of one of our clients the other day. He’d taken an approach that was challenging for some of his team. He said, ‘Who are our five biggest competitors? And which one of them are we putting out of business?’ Larger enterprises will likely consolidate their suppliers and push them on margin or terms. Focus your sales effort on going after a competitor that’s looking weak.
Let’s be realistic for a moment. It’s going to be harder to win new business in a recession. So all the more reason why you need your Account Managers to focus on growing existing accounts.
When I took over as MD of Peer 1, the average spend per customer was $249 per month. By the time I left, this had grown to $2,200 per month. This was due to our relentless focus on selling to our new core customer—one with the potential to spend north of $10k per month. Once customers know and trust you, they will likely buy from you again. It takes as much effort to win a new account with no potential than to win an account with huge potential. Our largest account when I left was spending more than $1m a month.
Your Account Managers are the people who protect your margin, so make sure they know the revenue from their accounts and their percentages. Introduce OKRs as part of their plan to grow their accounts.
Project by project, managers need to be accountable for the profitability of their projects. The margin needs to be maintained. Too often, people go from charging for time and materials to a fixed price. If it’s a fixed price, it needs to be fixed time. Your project managers need to be good at managing the customer if they start to slow it down. Consider charging for standing time to introduce friction if this happens.
If you’re going through tough times, it’s easier if everyone’s in the office together. Communication is likely to be more critical than ever. Being face-to-face will make this much easier. In times of crisis, people get nervous, and it’s your job to be confident and reassuring about the future. CEO in this context means Chief Energy Officer. The culture is on you, and you’ll need to manage morale.
Recently, one of our clients brought all their teams back to the office. They took the edge off this announcement by saying it would initially be for three days a week and pointing out the company’s flexible working policy. In the end, only two people applied.
Hand in hand with bringing everyone back to the office, make sure you measure staff engagement. Our recommendation is Friday Pulse which acts like an early warning system, telling you when people feel unhappy or insecure about their jobs. Then you can act quickly to communicate and reassure before things spiral out of control.
Likewise with Net Promoter Score. Keeping your existing business happy is essential, and NPS is an excellent barometer for customer engagement. This is how you minimise churn.
Dominic Monkhouse is a proven architect of business growth with a demonstrable track record. As managing director, he scaled two UK technology companies from zero revenue to £30 million in five years. Since 2014, Dominic has worked as a CEO and executive team coach, helping ambitious CEOs and their leadership teams reach their full potential and achieve sustainable growth. He is the host of “The Melting Pot with Dominic Monkhouse” where he talks with some extraordinary thought leaders, fellow business authors, and CEOs to absorb their wisdom. Dominic is the author of F**K PLAN B: How to scale your technology business faster and achieve plan A, an exciting blueprint for cultural change and business transformation.