April 3, 2020

Lessons From The 2007 Financial Crisis: How To Prepare


Are We Really About to See a 2020 Global Recession?

The Coronavirus (Covid-19) pandemic has sparked intense fear and uncertainty in financial markets, meaning that investors, business owners and citizens everywhere are facing the unsettling reality of a global recession.

In modern times the world hasn’t seen anything as economically damaging as the Coronavirus has been - and we’re far from out of the woods yet.

But despite the bleak outlook for the immediate future, the situation doesn’t mean that businesses are completely powerless as they try to navigate the struggling financial marketplace of today.

Continue reading to discover some of the key lessons that organisations can learn from the 2007/8 financial crisis along with some of the ways that business owners can prepare themselves for the times of economic difficulty that likely lie ahead.

Why is Coronavirus the Driving Force Behind the Current Economic Decline?

From the very beginning of the Coronavirus outbreak it’s been clear that the pandemic affects both facets of the economy: supply and demand.

The supply of both goods and services has been marred by factory and office closures, and the direct result has been a sharp fall in output.

As one the largest manufacturers and exporters of consumer products, factory shutdowns in China have snarled a huge portion of global supply chains.

On the flip side of this, demand has also sharply fallen because consumers are now staying at home and spending less money. Both the tourism and hospitality industries have been hit particularly hard by Covid-19.

With people being encouraged to avoid travel in order to curb the spread of the Coronavirus, this has slashed demands for flights, hotels and restaurant bookings. The reality for many in these sectors has been a reduction in work hours or complete job cuts.

It’s been predicted that the longer the Coronavirus pandemic lasts, and the more severe national government’s efforts are to contain it, the more damaging and long-lasting the effects will be for the global economy.

At the time of writing this article, the Coronavirus situation is a live and constantly-developing issue which only adds to the uncertainty.

Lessons From the 2007/8 Financial Crisis

Beyond doubt, a global recession triggered by the Coronavirus outbreak would look very different from the financial crisis of 2007 and 2008.

The 2007/8 recession saw a slow grind to recovery as households and banks gradually got back on their feet. The ‘Coronavirus Crunch’ is predicted only to be a short-term struggle, with the global economy expected to swiftly rebound once the pandemic is brought under control. (This isn’t guaranteed though).

But, just because the situations aren’t identical doesn’t mean that there aren’t lessons that can be learned from 2007/8.

Action and Inaction Both Have Consequences

One of the key lessons learned during the 2007/8 financial crisis is that it’s important to do a lot, and do it quickly.

The financial crisis demonstrated that confidence in the financial market cannot be quickly restored once it has been severely damaged.

In a world that was becoming increasingly interconnected, a relatively localised liquidity crisis in the United States very quickly became a large-scale crisis of confidence for the entire world.

Without the policy decisions that were made in the wake of the 2007 financial crisis, it’s been suggested that more than 17 million jobs would have been lost in the United States alone (which is almost twice the actual number), financial markets would have contracted for almost double the length of time that they did, and the global economy would have been far weaker than it was pre-Coronavirus.

Even if only hypothetical, the 2007/8 financial crisis has shown that both action and inaction can have serious economic repercussions. The silver lining is that after every global economic crisis in the past, markets have always been able to forge new beginnings.

Recession-Proof Your Business to Succeed in a Struggling Marketplace

Take the Time to Stress-Test Your Business

As the 2007/8 financial crisis demonstrated, some economic circumstances cannot be foreseen until they happen.

Before your business finds itself in a sticky financial situation, it’s a great idea to run through various difficult scenarios and how your business would fare if you faced a sharp drop in sales.

To build a contingency plan for your business, consider:

  • What would happen if your business model or strategy had to be adapted to fit with a changing market environment?
  • What if key people in your business were suddenly unable to come to work (due to illness or natural disaster)?
  • What would happen if you lost your best customers? How much would this impact your sales?

Protect Your Business Cash Flow

To keep your business healthy and running successfully, cash needs to be continually flowing. Companies with positive cash flow and strong financial flexibility are far better equipped to weather the storm of economic downturns by avoiding the costs of financial distress.

The harder times get, the harder it can be to keep your cash flow up. But, no matter how rough the circumstances get, you should always know your expenses inside out and take some time to review your inventory management practices.

Make the Most of Your Current Customers and Clients

When running a business, it’s far more cost-effective to retain customers and clients rather than constantly have to go out and find new ones. Times of economic difficulty are no different.

If you’re serious about recession-proofing your business, you can't afford to ignore any potential profits involved when shifting your sales focus to include loyal customers who you’ve already done business with in the past.

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INAA is an International Association of Independent Accounting firms, established over 25 years ago to facilitate cross-border business.

During these challenging times, our collaborative association of international businesses is committed to being a part of the global conversation. We connect accounting firms who are committed to delivering quality professional services around a shared vision to make global business personal and take personal business global.

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