What If A Short Crisis That You Expect Turns Into A Deep Recession

At this point in time, the number of persons infected by the Corona Virus, or Covid 19 as it is known, appeared to be stabilizing in China. However there seemed to be doubts regarding the numbers reported. At the same time, the number of infected persons outside China rose significantly. South Korea reported hundreds of infected individuals related to a Church. The virus had also spread to Europe with Italy reporting infections of more than a hundred.

There are many views regarding the direction the crisis created by Covid 19 is going. One view is that the number of infections would peak soon and starts to stabilize and then declines when the weather gets warmer. Another view is the possibility of an explosion of infections worldwide as many countries seem to be ill prepared to not only detect but contain the outbreak. When this happens, the world could come to a standstill resulting in a recession in many countries. Already analysts had been shaving points off the growth rates of China, Singapore, South Korea and other Asian countries. Japan was already in a recession in the last quarter of 2019, though not related to Covid 19.

This blogpost would not attempt to predict the outcome of the crisis. It would concentrate on what is important for entrepreneurs to start up a business and do well during such difficult times. The questions that one would ask here would be the moves to take should the crisis leads to a recession in your country or even worldwide. Furthermore the jury is still out as to whether the recession, if it happens, would be relatively shallow with a V-shaped recovery or a deep one where it is more L-shaped.

Given the situation, entrepreneurs should be more cautious in their undertakings. Going in too early in what seemed like a bargain rental rate in a prime location at that time could turn out to be a millstone should the economy go into an L-shaped recession. Entrepreneurs should be extra conservative in doing their financial projections. They should use the worst, expected and best case scenarios and factor in further possibilities of the situation going downhill further. In other words, factor in a more pessimistic expectation.

Having said that, there is a chance that the bleak financial projection could still show a possibility of a profitable outcome or a breakeven even in the worst case scenario. In such a case,  one should not hesitate too long in trying to catch the bottom or negotiate for the best possible deal. It is possible that one could obtain lower rental rates if the downturn continues. However the choice location may no longer be there by that time. Thus it may be wiser to pay a bit more for a choice location even though the end is still not in sight. It is never easy to catch the bottom. In any case, if the bottom comes, the optimism generated by the realization would quickly translate into much higher rental rates within a short period.

Besides rental, entrepreneurs should lookout for fire sales created by those going out of business. These fire sales create opportunities for startups to pick up assets on the cheap. For some, it could also mean the chance to purchase a business lock, stock and barrel minus the debts. With lower asset prices, entrepreneurs have a higher chance of success as their depreciation costs would be much lower. This would allow them to price products and or services more competitively, something necessary in a downturn.

Another opportunity would be in the purchase of distressed or surplus goods which the original owners had difficulties in getting rid of for whatever reasons. However it is important for entrepreneurs to concentrate on goods within their area of expertise. This would allow them to know when the prices asked for are bargains. Be careful in purchasing distressed or surplus goods which you had no experience in selling whatsoever. This is especially so if the prices asked for appeared to be cheap. The learning curve in going into a new area could prove to be more costly than anticipated. Thus what initially appeared to be profitable could turn out to be a money losing venture.

Finally the most important is the need to be nimble and flexible during this period of uncertainty.