Challenge and Opportunity in Times of Economic Change– April 15, 2019 by Rob MacKinlay

Cohen & Company’s annual Executive Focal Point program gave us another opportunity to engage in great conversation with some of northeast Ohio’s top business owners in an intimate, collaborative setting. And opportunity certainly was the key word of the day.
 
While we are still in one of the longest, albeit one of the weakest, business cycle expansions our economy has seen since 1900, and possibly in history, the questions on everyone’s minds included, What’s next for our economy? Is there a recession in the near future? If so, what can business owners do to prepare now? Our group of experts offered their various perspectives but all agreed the focus should be on the opportunity a recession can bring for those who prepare for it ahead of time — adjusting business practices to not only weather the storm but to come out ahead on the other side. 

Is a Recession Coming?

The answer is, of course, yes. A recession is part of the natural ebb and flow of the business cycle. But when will it occur? While there’s no crystal ball, Russell Moenich of Sequoia Financial Group provided a macroeconomic perspective.
 
The U.S. remains at 2% GDP growth and likely will stay around that mark for the next 10 years, based on the current view of productivity and the working age population growth. The Trump administration’s focus on pro-growth, low taxes and low regulatory burden has resulted in a confidence boost to the economy, as well as a 35% decline in regulatory burden in 2017. However, there doesn’t seem to be a large uptick in spending on capital expenditures, so the ultimate impact of reduced regulation and tax reform is still yet to be seen.
 
While exports and global trade remain a worry for many, the greatest risk to the business cycle is still the Fed raising rates too much, too fast or both — not fiscal policy or tariffs. However, the Fed has a good chance of delivering a “soft landing” this time around — taking themselves off of “auto pilot” and using more of a “wait-and-see” approach in terms of raising interest rates.
 
Some good advice is to keep an eye on the slope of the U.S. treasury yield curve, which is a critical indicator of when a recession may be near. When the one-year and 10-year curves invert in a meaningful way, a recession could occur within the year. Another gauge of the health of the economy is the Global Composite Purchasing Managers’ Index, which currently indicates there may be a slowdown but not a full-blown recession globally. 

Preparing to Turn Recession Into Opportunity

According to Leon LaBrecque of Sequoia Financial Group and Jim Boland of Cohen & Company, recessions can be opportunities, not disasters, if approached in a smart way. While recessions are the “price we pay” for a free market economy, they too will end.
 
A couple questions to ask yourself as a framework to preparing for a recession may be, ‘What would you do if you knew a downturn were imminent?’ and ‘In prior recessions, what do you wish you would have done to be ready? Where would you have liked to have been when it started?’ You don’t need to do everything perfectly in your preparation, but you do need to do it better than your competitors. 
 
A key point in preparing for a recession or economic downturn is to think long-term and identify what differentiates your company. Don’t put yourself in a position to be reactive and make across-the-board cuts to save money (and ultimately weaken the business). Strategically plan for every aspect of the business to be prepared, more resilient, and able to make faster and more effective decisions.
 
Below are some of the actions to take BEFORE an economic slowdown to make yourself more competitive now, and in a better position to win later: 

  • Bring your leadership team together for strategic planning (discuss business conditions and goals, customer needs; bring outside perspectives to the table and track metrics that matter to the business)
  • Build a more agile workforce by breaking down functional silos (physically move team members next to each other in “pods” to improve flow of communication, collaboration and speed of decision making)
  • Build and protect your team (and hire the best); look for top talent from competitors who may be downsizing; cultivate talent you have
  • Have credit lined up now for when you will need it later (before credit tightens)
  • Find new ideas now, because R&D will slow down when the economy does
  • Conduct a “gut check” of the business (sit down with CFO and CPAs to gauge how the business is doing, looking at the balance sheet as well as investments in equipment, employees and portfolio, etc.)
  • “Lean up” (create a plan for all types of situations — if you’re doing well, if there is a 10% drop in revenue, 25% drop, etc.)
  • Have dry powder (build up cash reserves, have necessary credit in place, etc.)
  • Know your competition and what they are doing
  • Innovate and explore new ideas
  • Consider the use of Robotic Process Automation (bots) and artificial intelligence (AI) to bolster efficiencies (low cost entry points with high impact) 

Tips for Growth

Whether preparing for an economic downturn or simply managing your growing business, pay attention to the following key areas that may aid in growth and employee buy-in.
 
IT Capacity and Infrastructure

  • Easy to underestimate this critical area
  • Have strong understanding of the depth of your IT Department, its bandwidth and capabilities
  • Know the scalability of your infrastructure and processes
  • Treat IT as competitive advantage, not as a cost center 

Change Effect

  • Change is hard — Communicate the changes you are making and why to help obtain buy in
  • Look at your business objectively and be ready to make the necessary changes; then communicate them clearly
  • Full-cup effect — everyone has a different size cup/threshold for change before resisting; don’t change too much too quickly
  • Prioritize your change initiatives 

Culture Change

  • It is easy to underestimate the time involved in integrating separate cultures from an acquisition
  • Rearview mirror effect — people will inevitably look back on prior ways; focus on keeping them looking forward
  • Everyone has pre-conceived (conscious or subconscious) biases — acknowledge and communicate through them 

Effective Communication

  • Stay on-point
  • Communicate often (over communicate if necessary)
  • Choose your vehicle(s) carefully — deliver messages in different ways that are meaningful and memorable for various people/generations (face-to-face, town halls, podcasts, etc.) 

Transparency

  • Cuts both ways — it’s tough to deliver message people don’t want to hear
  • No good deed goes unpunished — Recognize that even the seemingly best ideas likely will have unintended negative consequences; think through any down-side risk so you can anticipate and manage it successfully 

Most importantly, always continue to look for opportunities that fit your strategic goals. Identify new ways to reduce costs, such as automating processes; cultivate your talent and stay open to key acquisitions (of people, products and companies) while maintaining a culture that creates fanatically loyal employees and customers.
 
 
Thank you so much to all of our speakers and attendees for sharing their insights at this year’s Executive Focal Point. We look forward to next year!
 
Please contact a member of your service team, or contact Rob MacKinlay at rmackinlay@cohencpa.com for further discussion.
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.