The 2022 economic climate: A rerun of the '70s?
August 19, 2022
By Craig Herbst
"May you live in interesting times" is an English expression claimed to be a translation of a traditional Chinese curse.
While seemingly a blessing, the expression is used rather ironically, given that life in "interesting" times often is filled with periods of turmoil and uncertainty. Whatever your philosophical beliefs, most can agree that we, right now, are indeed in interesting times.
With a greater share of the COVID-19 pandemic hopefully behind us, there are struggles many are dealing with, particularly the business community: Soaring commodity and fuel prices, pervasive labor shortages, rapidly increasing interest rates and talks of recession (to name a few). Such an economic climate hasn't existed since the mid-1970s.
How will the next 12-24 months look? Will it be a rerun of the 1970s economic climate? Great question. Unfortunately, no one can know for sure, making planning difficult, especially considering the multiple plausible scenarios.
As a business owner or professional, you might want to consider the following suggestions when preparing for whatever the future could bring:
Know your cost structure/drivers and stress test them
Many businesses have seen higher labor and material costs in the past 12 months. If you haven't done so, revisit your pricing.
Re-evaluating your current prices and adjusting them could help offset margin leakage. Additionally, performing a zero-based budget, where you scrutinize every expenditure, pays off in the long run by keeping old and new expenses in check.
Often, businesses have expenses that made sense at one time but no longer provide much value. If you look carefully, you might find savings.
Finally, modeling and projecting what the bottom line might look like at different volumes of business is invaluable. One way to do this is to separate fixed and variable costs, then model financial results at a 10% to 25% change in customer volume. Attempt to construct the worst-case scenario, then analyze and strategize for this potential situation.
Ask yourself: "How does it look?" and "What prospective changes can I make to cope?" Having a greater understanding of what the future might hold financially while having proactive strategies readily available is worth the peace of mind.
Reassess your leverage/debt and refinancing timelines
Whether it's an operating bank line of credit or a longer-term structured loan, assessing your debt levels before any potential times of stress is prudent. By evaluating your debt levels, you can consider and plan for different possibilities such as "What might happen if my bank line gets cut?" or "What if the interest rate doubles?"
You can calculate how this might affect your business and proactively construct methods to keep debt payments manageable if conditions change and create a potentially make or break business situation. 2008 anyone?
Assess your customer concentration
Large, profitable customers often are the lifeblood of a business. What if they leave you? What effect would this have on your company?
Sometimes losing a large customer can be out of your control. Consider the things you can control, such as creating a customer service experience that they likely won't be able to find elsewhere. The best way to retain your most important customers is to treat them as such.
Don't forget your employees
Inflation and uncertainty are likely affecting your most valuable asset, your employees, similarly to how it is affecting you. A simple thank you or token of gratitude can go a long way. Let them know how much they are appreciated, and it will pay off.
No matter what the next 12-24 months might hold, whether or not it's a rerun of the 1970s, assessing your business on a deep level can provide the flexibility you need, especially if there continues to be hiccups in the economy.
This article was previously published in the Tri-State Business Times.