by Mark O'Donnell
Last month we covered the seven deadly business sins in a slowing/recessionary environment. From our view and of the experts we follow, the end of this period may be on the horizon, but not until mid-2024, even 2025, for some industries.
Until an economic turnaround begins, last month’s guidance is best. However, understanding what your business needs to look like when we return to growth will shape your decisions today.
Knowing when to change your behavior to a growth orientation is difficult, especially for companies leading the recovery. How do we recognize the economic turnaround early to gain maximum benefit from the upswing? Consider three sources of objective information:
First, use your annual sales growth ‘rate of change.’ Annual Sales Growth can be measured by dividing the past twelve months’ sales by the same period last year, less 1. The result will be a positive or negative percentage. Track this macro trend on an ongoing basis. Also, pay attention to quarter-to-quarter sales, changes in your open P.O.s/Sales orders, and changes in bid volumes; all represent indications of market direction. Take care, though; it takes several months to indicate a trend.
Second, identify your leading economic indicators. Identifying what industries, companies, or economic indicators lead your company’s performance takes effort. Ideally, these indicators ‘lead’ by 6 to 9 months, allowing you to spot trends early. In addition, track your customers’ leading indicators to gauge their buying habits in advance. The federal government and some industry associations publish indexes regularly. You can also purchase this data from companies that track the indexes for you.
Third, trust your gut. Ultimately, no one knows your business, customers, and supply chain better than you. Talk (LISTEN) to people in your industry and take proactive action accordingly.
What to do when growth is coming:
1. Assess your financial position, your financial strengths, and weaknesses.
2. Revisit your SWAT analysis and market strategy. The recession has a way of changing markets. The weak players are potentially damaged, and smart players may become aggressive.
3. Recognize that economic recovery is not predictable or linear. Do not get ahead of yourself.
4. Determine your maximum sustainable growth rate. Growing too fast strains cash flow, and business failures happen when they run out of cash.
5. Pay attention to your systems and evaluate their scalability. Invest accordingly in capacity and efficiency improvements.
6. Make sure you have enough inventory on hand and/or a ready timely supplier and working capital. The quickest way to blow up your company is by selling from an empty wagon.
7. If you can acquire a company, this is a suitable time. Company values tend to be lowest near the end of a recession.
Economic recovery is an exciting time to be in business. Be ready, and you will prosper.
Mark O’Donnell, CPA, is Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727.