In Pursuit of Profit
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If the economy slows down significantly enough for a long enough period of time, we will be in a recession. But regardless of what we call it, the economy is slowing down. We know this because current economic indicators show that:
These numbers reflect an economy that is surely slowing, which means that businesses must be prepared to react accordingly by preserving cash flow. The key in determining how to respond will be in understanding what this slowdown is going to look like for business activity.
A guest post from our colleagues at CFO Selections:
When adversity hits, the knee jerk reaction is to swiftly cut spending across the entire organization, but that response is a mistake.
Strategic cost cutting can keep a business going through tough times, but it must be approached with long-term value in mind. Reducing costs should abide by three essential principals:
Evaluate your spending and determine where you can cut costs to weather tough times while still protecting critical functions, minimizing long-term expenses, spending where it could end up costing more not to do so, and looking for opportunities to reduce waste.
July numbers reported an increase in small business loan approval rates at big banks (i.e. banks holding more than $10B in assets). Approval rates of 13.5% in June rose to 13.8% in July, marking the first increase since January of 2020 when big bank loan approval rates soared at 28.3%.
This increase was mirrored in loan approval rates at small banks as well, which rose from 18.4% in June to 18.6% in July. This was a continued bump from 16.9% in May, but still remains well below the 50.3% mark that small business loan approval rates at small banks hit back in February of this year.
It is important to note that these loans were separate from the widely distributed government PPP loans that many businesses successfully applied for and received earlier in the year.
The widespread increase in bank loan approvals throughout July was accompanied by a continued decrease in the unemployment rate, bringing it to 10.2%. Unemployment had peaked in April at 14.7% and has continued to fall month-over-month since. July alone added 1.8 million nonfarm jobs as economic activity that had been restricted due to COVID resumed, especially in the areas of leisure, hospitality, retail, professional services, and health care.
These indicators may be a sign of an economic rebound on the horizon.
The word ‘downsizing’ is often accompanied by a cloud of negative connotations, but it is rarely the result of poor employee performance or leadership mismanagement. Instead, downsizing usually results from other factors like an economic slowdown, overcrowded market, plant closure, or manufacturing outsourcing. Downsizing is simply part of running a business, just like managing rapid growth, which means that leadership must plan, manage, and execute it correctly.
At the most basic level, managing downsizing requires four steps: developing selection criteria, determining how much notice to give, providing outplacement support to employees that have been let go (where applicable), and protecting employee productivity and morale among retained workers. These activities are typically considered part of HR’s purview, but downsizing has implications that trickle down into other areas of the business. There are numerous bookkeeping implications during downsizing as well.
During a recession, too many organizations try to cut costs indiscriminately. The savviest organizations, however, lean on the data to determine when to trim and when to ramp up spending to capitalize on new opportunities. A Harvard Business Review study from the 2009 recession showed that companies that strategically increased spending sooner actually weathered the downturn better. Shrewd business owners who knew when to cut and when to spend recovered lost revenue more quickly and positioned their businesses better for long-term success.
Companies that do not currently employ an accountant may be hesitant to hire one during this downturn due to the expense associated with doing so. However, some circumstances call for an experienced accountant, and a recession is one of them.