Guide to investing during a recession

How do recessions or economic downturns affect businesses in aggregate? 

Companies have a history of underestimating the urgency, scale, and breadth of actions required to manage and thrive in a downturn. According to a study of over 5,000 US enterprises over the last five downturns, companies saw sales decrease by 1% yearly, compared to 8% annual growth over the three preceding years. For most corporations, profit margins and overall shareholder return are also reduced. Weaker performance exposes businesses to the possibility of outright failure and the growth in investor activity, which has more than tripled since the last downturn.

Downturns often provide opportunities, and businesses must move beyond a defensive posture to seize them. Competitive volatility grows during downturns (for example, the rate at which companies enter or exit the Fortune 100 each year jumps by 50%), indicating an opportunity to capitalize on the downturn. Investment possibilities, such as mergers and acquisitions, typically grow more affordable. Some businesses also take advantage of the occasion to initiate significant internal reform.

Why can companies invest during a recession?

Some organizations may need to take defensive measures to survive the recession, but CEOs must also consider the bottom line to prosper. The companies that expanded more during downturns also experienced higher post-downturn growth, suggesting that expansion during a recession has competitive advantages that continue to pay off. Companies must maintain a balanced “portfolio of bets” over several timescales and engage in R&D and innovation if they want to expand successfully over the long run. A downturn shouldn’t impact long-term growth potential.

What actions should be taken before beginning investing?

Before even investing, it’s essential to learn about the company’s operations and financial status. Here are four actions that need to be taken care of, such as:

• Check if the company has a solid financial track record

  A company’s financial management reveals a lot about its ability to endure fluctuations in the stock market or unforeseen events.

• Track the potential for expansion

  The share price of a company with a long history of consistent growth will likely rise steadily in the future.

• Monitor the dividend history

  Strong dividends with consistent increases typically indicate a stable income source. Additionally, dividends sustain the company price if the market as a whole decline.

• Identify the risk factors that might have an impact on the business’s performance and future expansion

  Risk factors tell if the company is having a tough time breaking into the market or if it needs financing soon.

Three important things to keep in mind when starting investing

• Get debt free: It’s critical to pay off any debts before beginning investing so that fixed interest rates don’t pull down the budget. High debt levels can limit one’s ability to save in the future. Make a plan to get out of debt as soon as possible.
• Have an emergency fund in place: Generally, companies should have adequate bank balances and credit lines to manage short-term obligations and cash requirements.
• Make a plan for achieving the objectives: The corporate planning and treasury team should work on tactical planning on the cash/liquidity. A company may require more cash in the short term to run operations compared to expanding operations in a recession. A recession will eventually lead to a change in priorities of project execution and capital allocation.

How can the treasury take advantage of a recession?

De-leverage the balance sheet:

A recession is a good time for positive cash flow companies to de-lever the balance sheet as interest rates tend to be lower before growth picks up again. Repaying debt at a lower borrowing cost will boost the company’s bottom line.

Go for aggressive leveraging:

Corporates seeking risky investments increase their leverage multiples during the recession due to the lower borrowing costs. They often engage in carrying trades on emerging markets to magnify the returns.

Plan liquidity for M&A:

M&A has become a significant aspect of many organizations’ strategies, with deal volumes moving upward for several years. During recessions, companies with poor capital structures should look to raising capital targets to acquire for horizontal/vertical mergers. 

Avoid cash drag: 

Most companies go defensive during a recession, but that creates a negative return on the overall capital available due to lower returns on cash balances (i.e., cash drag ). It’s better to plan better ROI alternatives for cash surplus rather than letting it sit idle on near-zero interest rate accounts. 

How HighRadius’s treasury software can help in investing during a recession?

With HighRadius’s treasury software, businesses can:

• Monitor cash flows and scenarios to identify a liquidity crisis.
• Track idle cash and use them for investments and M&As.
• Gain visibility into long-term cash forecasts to guide investment portfolios and plans.

Customer success story with HighRadius:

A $1.5 billion-dollar construction company faced these challenges:

• Seasonality affected operations and created unpredictability.
• Inability to identify idle cash as most financial systems were siloed and decentralized. 
• Impossible to integrate data seamlessly and achieve granularity to create timely reports and genuinely understand the areas of growth. 
• Decentralized cash flow forecasting led to poor granular visibility and low accuracy.
• Inability to perform long-term forecasting accurately hindered confident decision-making from managing idle cash, which could otherwise be used for M&A, fixed assets, buyback stocks, etc.
• Cannot grab investment opportunities early as CFOs have to rely on static and obsolete data for making timely decisions.

HighRadius AI-Powered Forecasting provided it with the following results:

• Higher confidence among investors with accurate & timely reporting
• Better decision-making by examining the risks and rewards of various options through accurate stress testing and rational scenario planning
• Enabled manual override to check for various scenarios and take necessary actions. 
• Accurate long-term forecasts to manage idle cash, which could otherwise be used for M&A, fixed assets, buyback stocks, etc.

Schedule a call with one of our experts to learn more about improving your long-term plan and investing wisely during a recession.