Despite some positive signs in the Arizona labor market, growth may slow in the next couple of years. Unemployment is low, prices on housing and consumer goods are high, and average consumers are cutting back on spending as their paychecks fall behind expenses. Given this, how might smart leaders prepare their businesses?
Keep Perspective
The economy works in cycles. A recession, downturn or contraction are all normal elements of any functioning economic system. The assurance, however, is that a recovery will be around the corner.
So, is a recession coming? Is the recession already here? Given economic indicators are mixed and people and politicians argue definitions, now is the time to fortify one’s business.
Cash Is Still King
Protect the cash flow. Cash is the oxygen that keeps business moving. Many businesses are likely entering the current economic period flush with cash from the Paycheck Protection Program and stimulus money. Despite this, businesses should maintain laser-focus on the cash cycle. Some suggestions:
Look at accounts receivable and determine how many are aging. If the number is higher than zero, work to collect on the hard work already done.
Manage inventory. Do not acquire inventory that cannot easily be converted directly into cash sales in a reasonable amount of time. Should inventory start becoming outdated, focus on moving it now in order to both optimize and add more cash into the business’s pocket.
Manage all spends. Review each spend category for items that may be delayed or eliminated. Work with vendors to establish favorable payment terms or discounts for early payment.
Manage the Business’s Capital
Inflation is high and will impact business purchasing power. In addition to ensuring cash reserves are met, it’s wise to look at the business’s debt structure:
Does the business have a line of credit with one or more banks? If not, best not to wait until it is needed. Be prepared by applying now while the business’s balance sheet is solid and before interest rates climb again.
Look at the business’s debt portfolio for loans that should be consolidated or refinanced. Loan rates are higher than they have been, but they might still increase.
Have a direct, ongoing relationship with the bank? If not, invest the time in making one as, down the line, responsiveness will matter.
Keep all financial statements up-to-date and regularly inform the business’s banker in real time.
Plan Dynamically
President Dwight D. Eisenhower is famously quoted saying, “Plans are worthless, but planning is everything.” Financial experts agree — planning helps make everything progress intelligently.
Good plans are dynamic, including anticipatory financial and non-financial models. When the future is uncertain, double down on planning. Explore various business scenarios and shape up plans B and C. Why so many options? Never stay married to just one single plan because, if something changes, it will be harder to respond in a timely and intelligent way. With heavier emphasis on planning now, smart leaders will meet future challenges more confidently, having cultivated adaptability for the business.
Take the first step: Creating a budget is the first phase of financial planning. It is a process that aims to predict what might happen under certain circumstances.
People Matter
Especially in a service-based business, core strength comes from the physical team in place. This is also true when payroll is the highest expenditure, revenue is drying up and it may seem like it is easier to cut staff in the short term. This is where one’s planning skills are put to the test. Forward-thinking business leaders know that any economic downturn will eventually end, and that when their business begins to regain growth, they will need to be ready to serve old and new clients. Talent matters.
Case in point: Anyone who has traveled by air recently has likely seen the immense challenges that airlines experience as they rush to ramp business back up after the COVID lockdowns. Talk about turbulence, to say the least. While the health crisis has been an extraordinary challenge, it would be remiss for business leaders to not learn from the hardships of others. Support the team. Support the talent. Recognize the talent.
Look for Opportunities
Finally, leaders should take a hard look at how the business might improve efficiencies. Are there new technologies available to streamline any processes? Are there products the business might create to improve? Are automation efficiencies worth consideration? Are there industry laterals that might be less impacted by an economic downturn?
Pursuing strategies like this can help put any business back in control of its destiny no matter if the economic storm on the horizon is simply passing or steadily growing.
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Did You Know: The National Bureau of Economic Research officially defines when the United States is in recession. Since 1777, there have been 48 recessions. The period between the two most recent, which were the COVID-19 recession and the Great Recession, was the longest period of economic expansion in U.S. history since 1854.
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