The economic downturn is here, and with it comes the possibility of a recession. While it’s impossible to predict exactly what the future holds, it’s important for businesses to take steps to weather-proof their operations in order to prepare for the worst. While there’s no one-size-fits-all approach, there are certain steps that business owners can take to ensure their business is resilient should a recession occur. In this article, we’ll explore some of the most important steps that businesses can take to weather-proof their operations and processes to have a stronger base to support their success in the face of economic uncertainty.
“It all has to tie back to a budget and then to the cash flows of your business. When you are clear on that, it gives you the confidence to operate effectively, and understand the impact of different scenarios.”
-Jason Kruger, Founder Signature Analytics
The Signature Analytics team tackles the possibility of a recession
As business owners ourselves, we sat down to talk through some strategies and tactics that business owners can take to reduce costs, make smart and strategic moves, and, weather-proof their businesses in these times of economic fluctuations. Here are some excerpts from our conversation (edited for fluidity and context).
For many businesses the ill effects of COVID have receded, freight costs are coming back down to a manageable level, and the costs of raw materials are also coming back down. With these reductions in costs, there are choices to be made. You can keep those increased margins knowing that times may get leaner in the fairly near future, or you can pass those cost-cuts on to your customers in hopes of driving more business and increasing revenues. Each of these strategies has its merits, you really have to dig into your numbers to make the call that’s right for your business and your industry.
To make that call and many others we dig into here you’ll have to have accurate financial reporting – it’s what we do best so it’s where we think all smart business decisions start.
“Business owners need to really invest in scenario planning, what happens if revenue is 10% below what we think? It can happen. You have to understand your variable versus your fixed cost. I suggest you take a long look at ways to reduce some of your fixed costs.”
-Pete Heald, CEO Signature Analytics
Compensation costs are holding steady
There’s one area where costs are not coming down, nor will they anytime soon, and those are compensation costs. The minimum wage keeps rising and the unemployment rate is still at historic lows despite the flurry of cuts at the largest tech giants. No one is taking a pay cut just because the world has opened back up and supply chains are moving again. If your business is hiring new people right now and you’ve adopted a hybrid or remote work model, there are some interesting decisions to be made in terms of where you source your people and how you compensate them.
Here in Southern CA, the unemployment rate is 2.5% and if you’re hiring a brand new college grad, you’re paying a premium in many industries. If however, you are open to remote employees, it opens things up quite a bit. It means you can hire anywhere which can bring big changes to comp structures and benefits structures.
As you’re looking at your margins and spending across the board, don’t forget to take the time to audit those employee benefits. You want to be sure that the benefits you offer are doing the job they’re meant to do: attract and retain great people.
When we audited our work environment and employee benefits we discovered that the majority of our staff preferred to work remotely. That opened up the option of reducing our real estate costs while providing a hybrid remote-first work environment that works for us, for our margins, for our culture, and for our clients.
Re-examine your debt and get a good banker
Another area in which business owners can take action to reduce costs and prepare for the possibility of interest rates continuing to go up is by re-examining their loans. If you don’t have a good relationship with your banker, build one. A banker should be your ally. If you do have challenging quarters (or years) having a banker on your side is beyond helpful.
Take a look at any variable-rate loans your business has and see if you can refinance at a fixed rate. Some SBA loans which started with very low-interest rates (around 5.75%) are already up to 10.5% and could go as high as 12% in 2023. Consider the term of that fixed rate however, ask “where do I think rates will be in 2 or 3 years?”
The key to a good banking relationship for your business is communication. A good banker will be a resource throughout the life of your business if you are transparent with them and share your financial reporting. The truth is: they’re going to find out if you’re having financial troubles. It is better to share your financial statements with them early and help them be an advocate for you. Your banker will have resources and insights to share. If you keep your banker in the dark it creates concern about what else might be going on that you aren’t sharing with the bank. That concern could create an adversarial relationship that neither of you wants.
John Harelson at Endeavor Business Bank says:
I care about every one of our clients and I hope they think of me as a resource and an ally. When business owners come to me with financial challenges I’m eager to help. Depending on the issue they are facing, I can provide introductions to trusted connections for a wide variety of business challenges too. I have introduced organizational change consultants, HR, legal services, or, in the case of Signature Analytics, great financial management, and outsourced accounting. I want all our banking clients to do well. It’s why I do what I do.
Most loans have financial statement reporting requirements as well as metrics and behaviors built into the loan covenants. Those requirements are very important to your banking relationship. Always know what metrics and behaviors need to be met, reporting any violations as soon as possible will help ease the concerns of your bank that you are on top of it. Bring a partner like Signature Analytics in so your accounting department isn’t racing against the clock and get those financial statements and compliance data to the bank on time.
How can nonprofits prepare for a recession?
We’ve been working with the Trevor Project and a number of larger nonprofits for years. When NFPs are doing financial scenario planning in a down economy, they have to plan for the likelihood that fundraising may decrease. 2023 fundraising may not be at the same levels as 2022.
The challenge for many nonprofits is that just when people are tightening their belts and less likely to give, that’s when their services are needed the most. Saving money on operational costs is essential. Outsourcing non-core functions – HR, Accounting, and Marketing can be a way to reduce those operational costs. Outsourcing can provide on-demand expertise and increase efficiencies at a flexible cost that will be able to scale up and down.
Risks that outsourcing can address (mini-case stories)
Scaling up (or down) based on immediate needs:
We just started working with a company that had a part-time controller for years. That one person couldn’t scale up when they had a huge influx of business and that was just the time they didn’t have time to onboard new employees. Outsourcing with a reputable partner means they can scale up (and down) quickly based on immediate needs. For this client: we came in and got all the systems and processes in place, set up their day-to-day accounting and provided those services, and stepped in in that controller role to keep the finances running at full speed even as their business grew at a rapid pace.
Losing a key person:
With unemployment so low, recruiters are pulling staff from one company to another with regularity. Having an outsourced solution protects you if you lose a key person. Without someone to fill in and without clearly documented SOPs you can find yourself running blind. That person that left might have been doing invoicing and processing payroll, key functions that take time to teach. It’s easy to put too much reliance on one person especially if you are running lean. The loss of a key accounting person can mean that a business can’t collect its invoices in a timely manner which puts real stress on a business.
We’ve recently stepped in and filled a leadership role in a prominent NFP while also providing accounting help in the day-to-day side of their financial operations.
Our Partner Satpal Nagpal at GHJ shared some insights with us about the value of reliable financials for both nonprofits and for-profit companies.
These are excerpts from our conversation:
These are uncertain economic times. There are conflicting signals of a recession, will it be mild, or deep? When we see external uncertainties like this we feel it is even more important to control those things that are controllable. You don’t want to layer on an element of uncertainty in your decision-making because of unreliable financials. Making sure you have a solid foundation you can trust with accurate reporting, reliable bookkeeping, and accounting services will provide you with the right data to make predictions you can trust.
Because of the level of uncertainty out there in the financial landscape, businesses should be engaging in scenario planning for whatever comes their way. What will you adjust if the recession is mild vs deep, where will you cut back or what levels will you manipulate? These scenarios must be built on the backbone of good financials. And an audit of your financial statements can set you up to make better business decisions.
The fact is, in a tight fiscal environment, lenders and other financial institutions look at businesses’ financials with a sharper eye, and you don’t want to be caught off guard. For example: Nonprofits received funding from a lot of sources over the last 3 years [due to the pandemic and other factors]. As that money came in, the criteria for how it was to be spent and what oversight was going to be put in place was unclear. In my opinion, that’s about to change. And when it does, having a good process of internal financial controls and compliance will make the process of audits and compliance much more straightforward.
Making sure your business records are up to date and working with a strong team like GHJ to provide audits ensures that everything is in order when the regulators request information.
What business owners and nonprofits may not realize is that you can’t go into an audit unprepared. Audit preparation is a process that takes time and collaboration.
At GHJ, we build collaborative relationships to provide information to our clients, whether it’s benchmarking or best practices, or critical information on internal controls. That’s where our collaboration with Signature Analytics makes us very successful. That relationship provides business owners with a strong and reliable financial foundation and the audits to prove that their accounting andn finance departments are being managed with impeccable accuracy.
Maybe the most important piece of advice is to challenge your assumptions.
All the cost-controls and auditing we’ve been talking about has to tie back to your strategic budget for it to be implemented in a smart way. To weather-proof your business for a recession the number one step is to make sure you have really solid financials. Start with scenario planning, look at your debt, analyze what is variable vs fixed, and think about that business banking relationship. If you’re in a good place, take out a Line of Credit now. If you have one, extend it. If you wait until times are tough you may no longer qualify for the level of funding you qualify for now. Don’t assume your SBA rates are the only good rates out there, different lenders have different risk profiles.
Challenge your own rates and prices. Have you increased your rates to keep up? The narrative right now is that we all have to accept the rising cost of goods & services. But with a potential recession, the opportunity to increase prices may be coming to an end – if a recession hits, that opportunity to raise prices will be lost. So get clear on your margins, overhead, utilization rates, and cost controls and increase your prices now.
Places you may be inefficient and can make smarter business decisions:
- Look at your tech stack and make sure the technology you contracted to use years ago is still the best. Maybe you can move to a new system for less – you know you’re not getting those deals from year one anymore.
- Audit your real estate needs. We did. We realized our staff wanted to be remote – or hybrid and we chose to meet that need for our staff and at the same time reduce major overhead costs in our real estate expenditure.
- Challenge your assumptions about compensation and benefits. The right comp structures will attract the best people who align with your company culture.
- Audit your income statements
- Clean up your aging AR
- Examine those loans, and make sure you’ve got the best rates.
- Look at the various investments you are making in your business – re-allocating certain funds in down economies can be a wise move (just don’t get reactive!)
- Check employee utilization rates and org structures for inefficiencies.
All of these discussions have to come back to your strategic budget, and good financials. For us, that’s at the heart of good business decisions. It’s why we do what we do. We help business owners make smart business decisions.
If you have a topic you’d like us to do a deep dive on: send us a message, we’d love to hear from you.