By Bruno Annicq, chief financial officer, Gympass
Questions are swirling around the possibility of a recession. While CNBC recently noted that continued job growth “defies recession fears,” the economy has been contracting, leaving a lot of uncertainty. This can cause confusion and stress, affecting the decisions of business leaders and investors.
There are steps businesses can take to quell such fears. Based on experience, I know that it’s possible to minimize the impact of the recession – and in some cases, even recession-proof the business. At Gympass, after the pandemic set in during the early months of 2020, we had to radically transform our entire business strategy virtually overnight. We managed to come through it stronger than ever.
Businesses are unlikely to face the kind of sudden, dramatic plunge that Covid brought on. They have time to prepare for various possibilities. By being proactive, leaders can ready their organizations to navigate rapidly changing waters, come what may. Investors will do best when they look for companies engaging in these kinds of measures.
Increase focus on profitability
For many years, investors have largely rewarded growth over profitability. (Take Uber, for example, which has grown tremendously over the years without making an overall profit.) Low interest rate environments have helped to fuel this. So has the desire to reach as many global markets as quickly as possible. The fear is that if the company does not invest in expanding its reach, competitors can recognize the consumer demand and swoop into a new market first -- making it much more difficult for the company to work its way in later on.
In the last few years, I’ve had investors say we were not spending our money fast enough. Their mantra was “spend faster, grow faster.” Also, with massive revenues coming in and access to capital plentiful, growing businesses often feel in control of their own destinies and less worried about storing up for a rainy day. It’s a mentality that helps to fuel investments in R&D and new projects.
But when concerns of a recession grow, the calculus changes. Stakeholders want to see profits -- or at least a comfortable path to near-term profitability. Businesses need to provide one.
Scenario planning
Organizations should consider the most likely challenges that they could face in the coming months. Come up with a list of the big variables, and develop plans for how to handle those challenges if they arise.
This is why high-quality scenario planning is so important. As a 2020 study pointed out, scenario planning in business “is largely an adaptation and generalization of classic methods used by Military intelligence.” Include planning for scenarios that may be unlikely but very impactful -- like another pandemic.
Mapping out scenario plans is crucial not only so that businesses know what to do if a challenge arises, but also as a means of avoiding one of the biggest mistakes organizations make in a recession: panicking. Feeling nervous and confused, leaders all too often make rash decisions, such as letting go of a large number of employees. And as Bloomberg once explained, firing highly talented performers can be one of the biggest mistakes companies make in a recession, damaging their own innovation.
Embrace ‘napkin’ style math
All of this should be done with simplicity. The pathways to profitability and plans for handling various scenarios should be so simple that each one can be explained on the back of a napkin.
I use this method every time I speak with investors, board members, and other stakeholders. It helps them understand the big variables that impact the business so they know what to look out for. And it helps me get to the root of issues rather than getting lost in anything tangential.
It’s also important in providing guideposts internally. Each plan should include clear goals but leave room for how exactly to attain it. No matter how much planning you do, some specifics cannot be predicted. With simple plans in place, businesses remain agile enough to determine how to achieve their goals in the new reality.
Think long term
When something goes wrong, it’s natural to want to hunker down and protect what you already have. But as you formulate plans for handling potential downturns, it’s important to think ahead. What will be the long-term repercussions of the steps you take now?
For example, mass layoffs can make it much more difficult to hire talent later on, as many businesses have been discovering amid the “great resignation.” Similarly, infrastructure investments are typically the first to get cut, as they don't generate short term results. But companies often end up regretting these decisions because they lose the compounding benefits of having that infrastructure in place.
In looking for safer bets, investors should gravitate toward companies taking these kinds of steps. Those that do are most likely to stay grounded, focused and successful well beyond a recession.
Bruno Annicq is chief financial officer at Gympass.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.