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.
So, let’s take a look at what the slowdown may mean for your business and what to do about it:
What to Expect
The rising unemployment rate has effectively wiped out last year’s job gains, meaning that the ultra-hot job market is now showing signs of cooling off. This may make it easier to find entry-level employees and unskilled labor for jobs in warehousing, transportation, manufacturing, and other areas. However, this does not necessarily mean that employers will find it any easier to recruit top talent into skilled positions or roles further up the org chart. The higher salaries, more robust benefits, flexible work arrangements, and potential for bonuses that have been required to bring in top candidates over the last year and a half will likely remain strong incentives as the cost of living continues to rise.
The high cost of labor will likely continue to tip the scales towards outsourcing for companies trying to decide between hiring in-house or contracting out business activities like HR, IT, and accounting to third parties. As cash flow becomes more constrained and labor costs remain high, more companies will make the business case for outsourcing to reduce expenses, improve efficiency, provide greater scalability, and mitigate risk.
As stock market losses accumulate investment portfolio values are declining. While early or mid-career professionals may have time on their side to wait for their investments to rebound, late-career and retired professionals do not. Those that need value from their investments right away will likely not have the nest eggs they had hoped for. Companies will need to be cognizant of this fact for their own investment portfolios as well. Well diversified companies will likely be in a better position than those that have not diversified their portfolios, but they will likely need to ride this out nonetheless. Ideally, a company’s cash flow management should be sufficient to ensure liquidity without needing to dip too deeply into their investments. However, businesses that do not have the cash to cover their immediate expenses will need to determine how they will bridge this gap if their investments cannot be relied on to provide the cash needed to do so (or cannot be leveraged without paying steep withdrawal penalties).
Aggressive moves by the Federal Reserve to slow the economy down and thereby limit rising inflation are doing their job. Personal purchases in the way of homes and cars have fallen sharply, cutting short what had been a hot housing market. Expect that this same phenomenon will occur with major business expenses as well. Land, property, and equipment purchases have already slowed and will likely continue to do so through 2023 and into 2024. Companies will be more likely to rent instead of buy to convert fixed costs into variable cost. Furthermore, cash-strapped companies will delay major business purchases until interest rates fall.
How to Preserve Cash Flow
It is not just major purchases that are being delayed, consumer spending in general is falling. In the same way that many Americans are aiming to put away more in savings, companies must be taking steps now to preserve cash flow.
The following are proven cash flow management strategies:
Having the right personnel in place is crucial when weathering an economic slowdown. If you need part-time accounting help, our team of consulting accountants can help provide financial support for as much or as little time as you need it. Or, if you need to hire accounting or finance leadership in the form of a Controller, Accounting Manager, or Finance Manager, our accounting recruiters can help you find the right fit. Please reach out to us today to get the conversation started. We would be happy to help!
Note: This article is intended for informational purposes only and is not to be constituted as legal advice. The ideas in this article are speculations based on typical business behavior, not based on inside knowledge of any markets, industry, or individual business. Please consult with your accountant or tax professional regarding financial or strategic business decisions