Have you ever wonder that there is always a economic crisis and it always followed on with a recovery. And the thing is it's not just any ordinary recovery but stock indexes hitting new highs, property prices spiking etc. This probably is a testament of the saying "what doesn't kill you makes you stronger"!
Now, let's explore why we always have a recovery after an economic storm? And also how can companies make more money after an economic crisis?
1. Companies are allowed to reduce manpower and salaries during a economic crisis. This will bring down the cost of doing business. Staff is not able to jump over to other competitors easily and forced to accept a lower salary.
2. There are many not so efficient companies forced to shut down permanently. Those who survive will have less competitors to compete with. Those mom and pop shops, those already ailing businesses will be forced to shut during the time of crisis as they are unable to sustain (and profit) even during the good times. The ones left will certainly have better pricing power and consumer might not have a choice but to purchase from the companies and businesses that has survived.
3. It's a human psychology thing - during an economic crisis, people cut back on spending mainly due to fear of losing the job. The "fear of losing their jobs" actually caused job losses and slows down the economy. Hence, when in an economy recovery, people are tired of eating at home (to save costs), reducing holidays and buying gadgets etc, they will start to come out and spend. Once spending comes back, businesses naturally have to hire more people. When more people have jobs to do, spending will go up and malls will be full again. It's a continuous cycle.
4. Companies generally will use this excuse to conduct re-organization, reduce wastages, review contracts, rationalize capital programme and spending. If you work with a mid-size company, you will certainly notice that during good times there are a lot of unnecessary spending (think of your photocopier service, allowances, business travels). If you add those things up then you will realize that it'll lead to a meaningful savings. Every penny saved is money earned.
5. Some companies will take the bold step to explore new market, new demand during an economic downturn. It's a time where the staff will have less work to do and it's an opportunity to utilize them to explore and look at other new exciting opportunities. This might lead to new venture, new subsidiaries formed and new partnership.
6. Input costs are lower during an economic crisis and many times you can see the selling prices of products rise faster than the input costs, hence causing a surge in profit for businesses. For example, oil refineries, steel millers, plastic products manufacturers all relied on inputs from oil, iron ore etc. During an economic crisis, the raw material price is always low due to the drop in demand.
7. Most companies does Kitchen Sinking during an pandemic. It is painful and management will grab the opportunity to do so. For those who is unaware of what is Kitchen Sinking, it include write-offs (i.e. stocks that is too long in warehouse) and impairment/write-downs (i.e. asset prices like property, car values which has plunged during an economic downturn). We have seen companies after the dreaded economic crisis, part of their profit actually came from "reverse impairment". Think about this, during an economic crisis, some companies will be forced to value their land and buildings lower to reflect the current market value. When economy recovers and roaring again, the land and building prices will go up and companies will have to revalue them again. This revaluation exercise will lead to additional "profit" as part of accounting requirements.
