Elise L. answered • 03/08/24
Harvard MBA: Wall Street, VC, Corporate & Entrepreneurial Experience
During economic downturns, consumers spend less, credit markets tighten and competition between businesses intensifies. To survive, businesses must tighten their belts by implementing cost-saving strategies to maintain cash reserves, profits, margins and/or to just stay afloat.
Some strategies for reducing costs include:
Leasing equipment instead of buying. Since cash flow may be tighter than usual, large capital expenditures like equipment purchases may make less fiscal sense. By leasing, businesses can make lower, regular payments and preserve more of their cash on hand.
Negotiating discounts with suppliers and service providers is another effective strategy. Since economic downturns tend to make customer retention difficult for many kinds of businesses, suppliers and service providers are often more amendable to offering discounts in order to keep their business customers.
External sources for funding are more challenging to secure in economic down cycles. Accordingly, businesses may beed to bootstrap or grow their businesses with less (or no) external capital.
Sometimes, bartering (the exchange of goods and services without monetary payment) is advantageous. Because cash flow is constrained, businesses may be willing to barter with one another to reduce spending.
Suppliers may extend credit to their customers during economic down cycles. This is called trade credit.
Business contracts with landlords, service providers, and suppliers can be renegotiated. This may allow for more favorable terms and cost savings for the business.
More stringently monitoring and managing inventory is another strategy for conserving cash by avoiding excess supply with nowhere to go.
Reduction of all non-essential expenses (travel, bonuses, client entertainment, etc.) may be necessary during downturns.
Efficiency becomes imperative for businesses during down cycles. Operations must be streamlined to improve efficiency, reduce waste and maintain margins. This might entail staff reductions or maximizing staff productivity as well as automating particular business processes that don't require costly human labor.
For the longer term, businesses need to be proactive about implementing strategies for inevitable economic downcycles, even during booms and peaks. Investing in technology that drives efficiencies and cost savings can be a safeguard. Creating new revenue streams is another. It can be risky for businesses to put all their eggs in one income source basket. By diversifying revenue streams, businesses can make themselves less susceptible to downturns. Most importantly, regardless of the strength or weakness in the economy, businesses must be diligent about nurturing their customer relationships -- both existing and new. Relationship development is an invaluable investment that can pay dividends when times get tough.
