12 Mistakes to Avoid During a Recession

What characterizes a recession? Panic, desperation, overreacting – in other words, the opposite of clear thinking. Nowhere is this truer than in the business world, where companies make disastrous decisions that “seemed like a good idea” when the economy was at its worst. Today, we’ll run down twelve of these common mistakes and hopefully prevent you from thinking they “seem like a good idea” in tough times.

Sacrificing Talent to Save Money


It’s inescapable — the number one priority of every business is keeping the budget out of the red. This obvious fact is made painful during recessions, when profits shrink as costs skyrocket. Desperate (there’s that word again) to bring the budget in line, executives and managers are often tempted to lay off their best-paid talent. While this solves the immediate problem of the budget, it creates long-term headaches that are far worse. Without its best talent, a business emerges from the recession weaker and less able to compete. So cut wages, benefits, and perks if you must, but do not let your key talent go!

Resisting Entrepreneurial Culture


Successful business owners know that achieving high productivity is not always about following a rigidly enforced system. Rather, it often emerges from eccentric, “outside the box” approaches in which employees have the freedom to experiment and go with what works best. Unfortunately, recessions often smother this type of entrepreneurial culture. Sensing that tough times are ahead, many executives revert to command-and-control style bureaucracies because it gives them the illusion that they are “in control” of the company’s destiny – an illusion that the spontaneity of the old culture doesn’t offer. But it is precisely that: an illusion. No company ever prospered during a recession by becoming more like the DMV.

Becoming Excessively Risk Averse


Recessions are caused by any number of things, but what usually prolongs them is fear. (Hence the saying “recessions start between people’s ears.”) In addition to throttling the economy as a whole, risk aversion puts companies at a disadvantage, too. Rather than clamming up and adopting a conservative, defensive posture, most businesses would be better off taking Warren Buffet’s advice to “be greedy when others are fearful.” By all means, do your homework and calculate your risks, but don’t avoid taking them in knee-jerk fashion just because the economy isn’t doing well.

Halting Development and Expansion in Knee-jerk Fashion


Here we find another idea that seems to make sense – stop new product development and focus squarely on holding on to the turf you already have. But a deeper look at the situation (and at history) reveals how wrong-headed this can be. The one thing every recession so far witnessed has in common is that they all one day end. And when they do, it does a company no favors to re-enter a good market with no new offerings. Besides, as a Code Synthesis article explains, there are several advantages to expanding and developing new products during recessions:

“Office space becomes cheaper as the demand slows. It is easier to negotiate better deals with suppliers and partners as they become dependent on the revenue your business brings. Tax incentives for R&D, starting new businesses, and hiring people are often introduced during recessions to revive the economy.”

Cutting Advertising Spending Too Drastically


Direct marketing guru Perry Marshall has an interesting take on the trend of cutting ad spending during recessions. “If advertising is truly the means by which the business acquires new customers”, Marshall says, “then wouldn’t you do more of it during a recession?” The fact that most businesses don’t, is an indictment of how ineffective most advertising is. Rather than cutting ad spend across the board, try cutting ad spend on flashy, “image” advertising that is not accountable for results. Focus instead on ads that direct people to take specific action and that deliver quantifiable results.

Price Gouging


Like firing top-paid talent, slashing prices solves an immediate problem by imposing long-term consequences that are even worse. Sure, if sales are sagging, the quickest way to get a quick boost is lowering prices. But this changes the way your customers perceive you. In effect, you are training them to hold off on buying until the next price cut, and that’s exactly why each one only buys you a little time before you have to do it again. This puts you in a never-ending war against yourself, as each boost in sales is accompanied by thinner and thinner profit margins. Don’t give in to desperation. Rather than lowering prices, strive to position your products or services as a good value for the price you already charge.

Changing Suppliers for Negligible Savings


Every business owner knows that the right suppliers can make or break a company. The role suppliers play in the success of a business transcends the prices they charge, and includes such things as how reliable they are, they support they offer, etc. Unfortunately, these things are somewhat intangible and are not easily accounted for on paper. In recessions, this leads companies to abandon time-tested suppliers for new ones with cheaper prices. However,  unless the new supplier is equally reliable and supportive as the old, the true savings could be a lot less than they appear (or even non-existent.)

No longer providing credit


It’s perfectly understandable to prefer cash payments, during recessions and good times alike. It’s easier to spend, easier to document, and less of a headache than anything else. That said, a customer who wants to pay on credit is still a customer. Provided they do not already owe delinquent debts and do not have a history of non-payment, why would you turn perfectly good business away? The last thing you should do is make it annoying or difficult for people to give you money, so think long and hard before you decide to stop offering credit.

Believing Media-driven “Doom and Gloom”


Who is being hurt the most by the recession? Journalists (whose jobs are being threatened by an outdated business model) and politicians (whose jobs are being threatened by angry voters.) Is it any surprise, then, that these are the people spreading negativity and pessimism throughout the nation, hitting the airwaves day after day with depressing stories about how bad the entire economy is? Well guess what – the entire economy is not hurting. Some sectors (like Internet commerce and direct marketing) are actually thriving. Ditto for counter-cyclical businesses such as storage companies. These businesses aren’t letting cynical doom-and-gloom stories keep them down, and neither should yours! Operate on the assumption that you can succeed and take risks until some real-life obstacle (as opposed to one merely theorized about by journalists or politicians) prevents you from doing so.

Failure to Plan


It’s easy to scoff at planning, and point to all the pie-in-the-sky forecasts that sit on shelves without ever having a true impact on what the company does. However, planning is critical during a recession. Now more than ever, you should not be content to sit idly by and let the random gyrations of politics and markets happen to you without being prepared. Furthermore, you should have multiple plans – say, a best, worst, and likely-case scenario plan – that you can use in whichever case arises. The key is to plan in a rational way, without allowing planning to replace action.

Failing to Adapt


History is filled with companies and even entire industries that failed to adapt. (The RIAA’s much-belated embrace of digital music sales is a recent example.) It’s only human nature to avoid change until it is absolutely necessary. But few things are more dangerous during recessions than clinging to the past. Chances are, the market your company’s routines and practices were forged in is much different than the market we find ourselves in today, and the executive who refuses on principle to make any adjustments is courting disaster.

Ignoring Weaknesses


A strong economy can disguise a company’s weak spots with the good news and high profits prosperity provides. But when a recession strips these things away, problem areas are exposed – to you, and your competitors. As a business owner, you cannot control this, but you can control how you react to it. See the recession as an opportunity to address weaknesses that have long gone ignored, and perhaps you will emerge stronger and less vulnerable than before!

Written by Jeff Springer

Jeff Springer

Jeff Spring is the Finance & Markets Editor at BusinessPundit.com. He's currently spending his days backpacking across Europe. While he may be living outside of the United States, he stays connected to American financial markets and M&A's more than is probably healthy for any single person. His love of a good book and a Bloomberg terminal can't be understated. He can be reached at JeffSpringer@BusinessPundit.com