Annual Planning for a Recession in 2023: How to Prepare for Success
Is a 2023 recession on the horizon?
A recession is "a significant decline in economic activity reflected by a decline in aggregate demand, leading to lower output, employment, and income." This happens when consumers stop spending money because they don't feel confident about the future. In fact, it's the opposite of what you want - you want people to buy things. So how do you know when a recession is coming? Several signs indicate that a recession is coming in 2023. Let's look at some of them.
- Unemployment Increases
- Unemployment usually rises during a recession. During the Great Recession, unemployment rose from 4% to 10%. If you're wondering why unemployment is growing, it's because companies aren't hiring. They're cutting jobs and reducing hours due to weak sales or decreasing margins.
- Economic Growth Slows Down
- Businesses that feel less confident about the economy slow down their investment plans. Companies cut back on capital expenditures, such as building factories and updating equipment. When companies cut back on investments, they reduce revenue, reducing profits. Profits fall, and that leads to layoffs.
- Businesses and Consumers Spend Less
- When people feel less confident about their finances, they spend fewer dollars. People buy fewer cars, homes, appliances, clothes, and entertainment products. If consumers don't feel confident in their financial situation, they're likely to spend less, creating a self-perpetuating cycle. Access to capital becomes much more challenging during a recession, so financial planning becomes even more critical and has an outsize impact on your business.
Strategic Annual Planning Business Planning For a 2023 Recession:
The global economy has been growing steadily for over a decade. However, many economists predict it could slow down in 2023. No business is recession-proof, so even if your company is growing, the impact on the economy will impact your business during any short-term economic downturn. What do you need to know about preparing for a potential economic slowdown during annual recession planning? Are you and your team ready to make the tough decisions during strategic recession planning?
- Plan Ahead. As soon as the Federal Reserve announced that it planned to considerably raise interest rates to cool the economy and tame inflation, many investors began selling stocks and bonds. They worried that rising borrowing costs would make it harder for businesses to borrow money and consumers to buy homes and cars. Some economists say that if the Fed raises rates too high, the economy could weaken further, resulting in a recession.
- Be Prepared for a Recession. In addition to saving money, having an emergency fund is essential. A good rule of thumb is to have a six-month cash flow runway for your business - remember, cash is king. You don't want to run out of money as market conditions tighten. Make sure you review all of your major line items in the budget and all necessary expenditures. Be prepared to cut those not contributing to your business and ensure that all your decisions are data-driven.
- Keep Cash Flowing. With fewer customers paying bills, companies are likely to cut spending. This means less demand for goods and services. Companies typically reduce staffing levels during recessions, even though that might not be the best long-term strategic move as you don't want to lose your key players.
- Look for warning signs. It would be best if you kept a sharp eye on all of your leading KPIs. If you notice that sales are slowing, ask yourself why. Is there something wrong with your product or service? Are people buying less? Do you need to lower prices? Or maybe you need to offer better customer service. Keep an eye on the economic climate across industries. This will allow you to see what might be coming in the future for your business.
- Consider hiring more workers. If you need extra help, consider adding highly talented employees. There will be qualified people on the market that haven't been there for the last several years; this could be the time to prepare your business for the future. How will your business look on the other side of the recession? What talent do you need on your team to get to the next step? This may be the time to be bold, but ensure you properly analyze the risk.
- Don't panic. Even if the economy slows, most experts agree that we won't see another Great Depression. Still, it would be best if you didn't let your guard down. Make sure you're well-prepared financially and mentally. While a recession brings pain, it also brings opportunity, so make sure you are looking for available options.
Business Planning for a 2023 Recession
A recession can be an opportunity for businesses to grow. As consumers spend less money, there are fewer customers to buy from. This creates an opening for smaller businesses to take advantage of. However, knowing what you don't know about recessions is essential. You might think you won't be affected by a recession because you're small. But that couldn't be further from the truth. Small businesses are often the ones hit hardest during recessions.
The best way to protect yourself against a recession is to plan. If you wait until things start getting tough, it could be too late. And while you shouldn't panic, you want to ensure you're prepared for whatever happens next. At Rhythm Systems, we've helped thousands of executives create annual strategic plans in many business environments; see how we can help you with yearly professional planning facilitators.
Looking for more information on how to prepare for a recession in 2023? Check out our additional strategic planning resources:
How to Conduct an Annual Planning Meeting
Annual Planning: 9 Tips to Focus & Align Your Team with a Great Plan
How CEOs Can Avoid High-Cost Mistakes in Annual Planning
Best Practices for Annual Planning
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