The economic impact of Covid-19 will be felt for a very long time. Businesses have closed, certain industries have been devasted – all leaving thosands of people without jobs. By the end of June there were 649 000 fewer people on the payroll.
As we face these scary prospects and the unknown financial road ahead of us, many people reflect on the most recent major economic downturn in 2008 where it took several more years for employment and the economy to stabilise to previous levels. It marked one of the largest economic crisis of our lifetime.
Regardless of what the future holds, it is important for us to look at the business successes and failures from the most recent financial crisis and learn from that challenging time. Here are some lessons we learned from the 2008 recession that are still true in 2020:
One of the most common recommendations from financial planners to people managing their investments is to have a diversified portfolio in order to manage risk. That is also true for businesses and their customer bases.
If a company has only one or two segments of customers, regardless of how successful it may be at the time, that can be a risky. It is best to have multiple income streams and across different industries and types of customers that can be serviced. That way, the business will continue to exist if any of them go away.
One of the key factors for businesses that survived the recession is that they had a strong operating system. These are businesses who understand how the numbers work and how to run the business in an efficient way. Imprortantly, it is not just about having the system in place, but people with a good knowledge of the system who can effectively implement it.
It is ok to use debt to get into a business and it can be a common practice. However, it is important to preserve cash and reduce debt as soon as possible. Too much leverage in an economic downturn is a challenge.
The people who were successful during the recession were those who were not overly leveraged. When a business owner makes money, one of the things they will want to do is to reduce their debt load as quickly and effectively as possible.
We don’t know many things about the future, but we can predict it will be different than the present. Those who went through the recession ten years ago and may be struggling now should find confort in knowing the situation will eventually improve.. The key is never to get complacent and fail to think about the future.
Business owners should be prepared for what is coming next, even if they don’t know what that will be. To a certain extent, they need to be worried about it so they do not become comfortable where they are. Like a good chess player, they should anticipate a move a step or two ahead of time. It is important to scenario plan and be agile in how to respond.
During difficult times, whether it was a decade ago or in the present day, I have seen people panic. This is often the mindset of the weaker business leaders, and they ultimately don’t survive.
Compare that to others who look at the situation as one of opportunity. This becomes a time of less competition and a greater chance to consolidate their position in a marketplace. There are new advantages, such as cheaper commercial property and more available employees that were not possible just six months ago.
Warren Buffett said, “Someone is sitting in the shade today because someone planted a tree a long time ago.” This is the time where people start planting trees. There are currently some available opportunities and over time those trees grow. They may not immediately enjoy the fruits of their labour, but at a certain point in the future, they will be sitting in the shade.
“Someone is sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett