Building Your Wealth
Recession Or Not, Be Diligent And Move
There has been talk of a recession for some time. Depending on the data you look at, we may already be in one. CEO confidence has dropped to levels not seen since the beginning of the pandemic. Fear is plentiful, but bravery in the face of headwinds could result in tremendous opportunities.
By definition, a recession is two consecutive quarters of negative GDP growth. That is a very broad measure, but what about the impact on Main Street where small businesses operate every day? It may sound counterintuitive, but this could be the ideal time to double down and invest further in your business. At a minimum, it may well be a time to make key moves and not a time to push the panic button or stand still.
Recessions have a very negative connotation, but they can be a very healthy part of the economic cycle that can balance out certain segments and prevent overheating. Cost increases in countless goods coupled with labor market tightness are not sustainable long term—a slowdown will likely relieve and take some pressure out of the system.
One of the drivers of the supply chain crisis has been significantly increased demand for goods. A slowdown would mean demand is weakening, hence putting the supply chain closer to equilibrium. It could also make it a little easier to fill a key position, especially if the competition is treading carefully out of recessionary fears.
Here are some actions small businesses should consider:
Understand not just the macroeconomic impact, but the specific impact on your business and industry. Based on the inputs a business needs, who it sells to and where it operates, among other factors, create a unique recipe for each. Capital-intensive businesses will likely be more impacted by interest rates. Businesses that greatly benefited from the Covid-19 bounce could be hit hardest. A business with backlogs could actually benefit as supply begins to even out.
Review how well your balance sheet is structured to provide some flexibility and allow for potential opportunities. What does the cash position look like? Where are inventory levels? What about debt balances and the related costs? How susceptible are you to interest rate changes? And further to that, some banks are beginning to tighten their underwriting in advance of a potential slowdown. Have you talked to your lender about how they view you? You should, especially if any debt facilities will be up for renewal in the next 12 months or if there is any potential need for growth capital.
Work to understand your customer. What pain do they feel? From a broad perspective, the consumer is still in much better shape than during the Great Recession. According to data from the Federal Reserve Board even though total consumer debt balances have increased, paying bills is not an issue. The monthly payments needed to service debt as a percentage of disposable income are still at their lowest level in decades.
Watch supply costs and the whole supply chain much deeper—are goods moving faster and easier to obtain? Even with higher prices, this might not mean more cash tied up if inventory on hand can shrink a little. Understand your inputs and how key commodity price changes could impact the business. In the new gig economy, supply can be talent as well. It may be time to invest in talent that has not been readily available for the past few years.
Finally, have a plan B in place if there is a sizeable shock to the economy. Ponder the what ifs and how you would respond in each case. Revisit the cash reserves you keep on hand to ensure their adequacy. Having cash on hand provides the fuel to invest in growth, but also safeguards a company’s future if unexpected distress appears. Manage debt carefully. If interest rates skyrocket, how susceptible are you? What if consumer spending suddenly plummets? You can more confidently pursue plan A if you have proactively thought through what plan B would entail just in case.
Pay close attention to the events around you and how they impact your business, including what opportunities are created. Be educated, and be nimble, but remember that times like this are not the time to tiptoe. Just like so many unexpected success stories coming out of the Covid-19 shutdown, this could be the opportunity to pick up market share if competitors stumble.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.