How Do Companies Survive Economic Recessions?

Virtually the same way an individual would survive a recession, but with a few differences.

How Do Companies Survive Economic Recessions?
Photo by Andres Garcia

Virtually the same way an individual would survive a recession, but with a few differences.

Savings (for an individual) = Cash on the balance sheet (for a business)

  • Companies should be stacking up savings in case of an economic recession but they need to balance this with growth and R&D.
  • Capital raises can be a good way to get a lot of capital quickly and save it while continuing to invest in growth.
  • A capital raise can help a company weather an economic recession even if they are not profitable.
  • Individuals and companies should have enough savings to last 6 months without income or revenue.

Job salary = Annual revenue

  • Need to be in the right industry—people who do technical work for Tesla or Apple don’t lose their jobs in a recession, because Apple and Tesla have the savings to pay them no matter what—because they are in the right industry—they make so much money that they can have savings.
  • Individuals need to get into the right industry so that they do not lose their job in a recession—this also allows them to make more money and save.
  • Just like how someone can lose a job in a recession, a business can lose its revenue in a recession, without savings, or cash on the balance sheet, it will go bankrupt.

Diversify your income = Have more products or have more diverse customers

  • Individuals could benefit from having more diverse streams of income. This makes them not reliant on any single income stream. This makes them more robust.—it is more likely for a single income stream to go away than several diverse income streams.
  • Companies can create a similar effect by creating more products—this way if one product stops selling, the others may continue to bring in revenue.
  • Companies should also seek to diversify their customers—if a company has a deal with another business and that business is their only customer, they could lose 100% of their revenue if that business is no longer a customer. For example, Apple sells MacBooks to individuals, businesses, schools, etc., so it is unlikely that they would ever lose 100% of their MacBook sales because they have such a diverse customer base.

Frugality = Frugality

  • How can we effectively cut costs?
  • Individuals should always be trying to cut costs
  • This allows individuals to invest in stocks (notice how this is exactly the same as a business investing in R&D and ads—the business and the individual are both cutting costs to invest in the business)
  • Businesses should always be trying to cut costs
  • This allows companies to sell at a lower cost than the competition, potentially increasing revenue. Or they can sell at higher margins and increase revenue for more R&D, ads, etc.
  • Individuals cancel their Netflix subscriptions; companies lay off employees.
  • Individuals move from a 3 bedroom house to a 2 bedroom; companies move from large office space to a medium office space—or switch to online alternatives.

Hedges/Investments = Hedges/Investments

  • Bitcoin is just another way to increase savings—it has a fixed supply and appreciates over time. The downside is that in a market crash, the price of Bitcoin will likely drop, making it potentially less liquid than USD.
  • In the future, companies may allocate a percentage of their balance sheet to bitcoin. It would allow them to make significant gains but not substantially hinder liquidity.

Opportunities = Opportunities

  • There are usually many opportunities that arise in a market crash. One can look for undervalued assets: stocks, bonds, real estate—that have likely crashed due to others being fearful and selling or needing to sell to increase their liquidity or pay a debt. This creates an opportunity for the individual. This creates investing and business opportunities for those who can spot them.
  • There are opportunities for businesses too. Many businesses cannot survive economic recessions—this reduces competition for incumbents and creates space in the market for new businesses to be created.
  • It also is the best time for businesses to acquire smaller businesses with good tech or a good product. The early stage business may not be able to survive the economic downturn which will make them want to sell to a big company.