When economic recessions hit, it's time for businesses to tighten the purse strings, fire employees, take cover, and weather out the storm, right? Wrong.
For those who have eyes to see—and courage to act on what they see—recessions are times of vast opportunity. Aristotle Onassis built a $500 million fortune in the shipping industry at the peak of the Great Depression by buying freighters at bargain prices,
financed using other people's money. Joseph Kennedy, who bought a large pool of stock in a liquor company, also thrived during the Depression by understanding political trends (he made millions when Prohibition was repealed in 1933).
In contrast to the common perception that the Great Depression was a time of suffering for all Americans, James Gregory, associate professor of History at the University of Washington, says,"[During the Depression] about a third of the population suffered unemployment and difficulty. About a third of the population maintained their standard of living, and another third of the population did better in the course of the 1930s than they had done before."
What is the secret of those who thrive in economic chaos and difficulty? Is it luck? Exploitation? Of course not! Those who create wealth in economic busts live the same principles as they do in booms, while those who thrive in good times yet fail in bad are often products of luck. Hard economic times provide excellent strategic opportunities for entrepreneurs who are willing to buck conventional wisdom. There is absolutely no need to panic when you have a plan. But you do have to be willing to turn from the naysayers and be different.
With this in mind, here are six counterintuitive principle-based ways for wise entrepreneurs to thrive during recessions.
1. Take Better Care of Your People—Raise Salaries! While most businesses use downturns as excuses to cut back on investments in employees, smart business owners will do the exact opposite and capitalize on the opportunity to build leaders. The principle behind this is that people are the only true assets. Another way to say this is that people have intrinsic value, while material things have none.
It's common for entrepreneurs to view employees as liabilities, especially since payroll shows up as an expense on their income statement. The smart ones recognize that their people are their most valuable asset; the liability of payroll is the price to pay to have access to the assets.
While you may identify some employees who do not produce more than they consume within the business, focus on helping, building, and inspiring your best people. Give them a raise. Show strength, vision, and most importantly, gratitude to instill a culture of production and loyalty, rather than fear, and to get the best out of your people. It's common sense that people who feel valued perform better.
2. Spend More There are two general types of liabilities: consumptive and productive. Consumptive liabilities take money out of your pocket without directly putting anything back in,
such as clothes and food. Productive liabilities are attached to a corresponding asset that provides an increase in cash flow. For example, for a real estate investor, a mortgage could be a productive liability if she is able to earn more in rent than she pays on the mortgage.
The common tendency is to shrink budgets when hard times hit. The smart approach, however, is to identify where your money will have the most impact and increase your spending in that area—even if it means borrowing money to do so. I've already mentioned paying your employees more. Perhaps you should put more money into marketing; while other businesses in your industry are struggling and cutting back, you should be gaining market share. Invest in critical infrastructure that will help you be more efficient and increase your scale of economy. It may also be the perfect time for you to increase the scope of your economy—businesses exist to solve problems, and during recessions there are more problems to solve.
While you may need to trim the fat and remove waste from your budget, it's far more conducive to wealth creation to focus on increasing your production rather than on decreasing your expenses. Recessionary times are perfect to buy because most assets are undervalued and can be bought at bargain prices. Incurring productive liabilities and spending more can be an excellent way to increase production and market share during a recession.
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