The One Thing That Will Guarantee Your Safety In A Recession

There are two types of people in the world, ones who are afraid of a recession and ones who actually look forward to it. Yes, believe it or not, there are people who actually look forward to a market downturn. The vast majority of people of people, of course,  belong to the first category. Yet, it is the people in the second category that are among the most successful in the world.

Why do people in the second category like recessions?

  1. Their competitors often go out of business
  2. They can get the best talent for lower salaries, because their previous employers have either laid them off or shut down.
  3. They can acquire huge assets at a dirt cheap price, whether it is other companies, shares in other companies, real estate or other investments.

If you notice, all these things require one thing – Cash. The number one reason why companies go out of business is because they run out of cash and can no longer run their operations. In times of economic boom, they can raise money from investors or borrow it from banks but during a recession, even getting that becomes tough. Those that cannot do it eventually shut doors.

The same applies to individuals as well. Those who have cash tend to do much better than those who have little savings or even those who have tons of investments but little cash. The reason is because the value of most investments comes down hugely during a recession or a crash anyway and even finding buyers becomes very tough. When they then try to come up with cash immediately, they need to sell off their hard earned assets or the bank seizes them, leading to huge losses. These assets are then picked up by people who have  cash at a very low price.

Some of the largest companies in the world believe in maintaining healthy cash reserves. Now, to what extent one can actually do it varies greatly from business to business. But in general there are a five rules one can follow

  1. “Be Fearful when others are greedy and greedy when others are fearful.”

Warren Buffett, the legendary investor and one of the richest men in the world said the above quote.   In other words, when there is a boom, avoid making overpriced investments, where a bubble is building up. Of course, there are exceptions, for example if you are looking for the early mover advantage in a new market. However, if you can, wait. At some point, the bubble will burst, it is then that you make your move and aggressively make investments that are now available at dirt cheap prices.

2) Try to improve your profit margins.

Many businesses operate with a very tiny profit margin and that is their business model. However, unless you are a huge business  with existing cash reserves or in the first place, having a tiny profit margin is incredibly risky, as the slightest of market, technology or consumer habit shifts can completely destroy the business. If possible, try to figure out what new product or services you can offer that can fetch you a better profit margin. While you are at it, also try to look for clients who are more concerned with the highest value rather than the lowest cost, as you cannot make this shift with clients who only care about the lowest price, even if they are being sold junk.

3) Try to get paid as fast as you can.

If you are counting on a client to pay you and the client himself/herself goes out of business, what will you be able to do? Well, if you have existing cash reserves in the first place, it probably won’t hurt that much to wait a long time, but if you have little cash, you need to devise a way to get paid as fast as possible. One simple way to do so is to offer a flat discount in exchange for complete advance payment or quick payment. By, the way, how can you offer a discount? It is by having higher margins to begin with. If you have a very tiny profit margin, you can’t even afford to give a further discount and are at a much higher risk of being wiped out, unless you have existing cash reserves or can quickly get more capital.

4) Focus on spending only on areas that have a direct/indirect correlation with ROI.  Advertising in the wrong places, renting or buying huge spaces, getting equipment that’s not required, premature infrastructure development, hiring the wrong staff are all areas where businesses waste a lot of money. While a big business can easily get away with it, it is the smaller ones that tend to get punished the worst. Ideally the business should be re-investing the money in sales, product/service creation and human capital. Scaling/further scaling should usually be done when there is proven demand through increasing orders/pre-orders.

5) Save a percentage of the profit like your life depends on it.

Depending on the country you live in and the tax laws, you need to figure out the best  strategy to build up the reserves and figure out methods to protect it against inflation. But no matter what, you need to commit to saving at least a portion of the profit and treating it as a reserve only to be used during emergencies or in order to acquire money making assets.

Choosing not to re-invest all of the money  may seem like a strategy that will lead to slower growth, however it is also the strategy that will also allow you to be in a strong position when times are bad and all your competitors are closing shop!

By, the above points can also be applied on an individual level and often turn out to be the difference between people who are able to shield themselves during a market downturn and those who get crushed!

A recession is a cyclical phenomenon which will happen whether we like it or not. But how you are prepared to deal with it is a choice you have, to some degree. As they say, change is inevitable, suffering is optional!