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According to a September 2022 CNBC survey, economic experts and fund managers believe there is a 52 percent chance of the U.S. entering a recession over the next 12 months, with many experts citing even higher odds.
Michael Tyler, chief investment officer of Eastern Bank Wealth Management, is one such expert.
“Inflation is getting stickier and harder to bring down. I believe the Fed has got its work cut out for it, and we may see higher inflation and higher interest rates for longer than many may expect,” he says.
“The Fed may unwittingly push the economy into a recession to slow down demand-driven inflationary factors.”
While business planning is always important, an impending recession makes preparation and communication especially critical. To protect their organizations and the financial well-being of their employees, business leaders should consider comprehensive strategies that encompass banking, insurance, and wealth management approaches.
Here are seven business planning tips designed to help leaders of small-to-mid-sized businesses position their companies for stability and growth.
1. Have a plan A, B, and C to manage through many scenarios
Every company needs clear goals and strategies for the year ahead to weather a possible downturn and economic rebound. Important as it is to have them in place, it’s just as important to be communicating those plans to business support partners such as banks, accountants, insurance providers, and legal counsel, as well as employees.
“Now is an ideal time for business leaders to bring their teams together, understand what their business is facing in the year ahead, and discuss with business partners what you’re anticipating and how you’re preparing,” advises Timothy Lodge, president and CEO of Eastern Insurance Group LLC.
Gregory Buscone, EVP and senior commercial banking officer of Eastern Bank, recommends having “a plan A, plan B, and plan C,” as well, based on different economic scenarios.
For example, consider how your company would manage if revenue slipped 10 or 20 percent, or grew by the same amount. Creating and discussing scenario planning for your business keeps key business partners and service providers informed about how you’re approaching your business, enabling them to better anticipate how they can best be of help and assistance.
2. Review your balance sheets
While many small- and mid-sized businesses were able to lock in low 10-year interest rates for long-term obligations, those same companies use lines of credit to support receivables and inventory that are “floating rate,” explains Buscone.
So, review your balance sheet and consider the impact of climbing interest rates. Additionally, work with your banker to lock in favorable interest rates, when possible, and to understand when to choose a floating rate versus a fixed rate.
“We will be reaching a point where you might want to go ‘floating rate,’ because rates will have gotten as high as they are going to get, and the only direction will be down,” Tyler says.
3. Focus on the long term
Tyler reminds us that recessions are relatively short, while economic expansions last longer.
“This is not something where you look ahead and you say, ‘Oh my goodness, business is going to be terrible for five years.’ It’s more usual to expect business may be lackluster for perhaps six, 12, maybe 18 months. Then things tend to normalize,” he says.
So, find ways to protect your cash flow that won’t hurt your business long-term, such as postponing costly projects, letting go of real estate, and reviewing your expense structure. And protect your talent. Despite the projected recession, unemployment rates remain low. Hold onto your A-players, since in this market your competitors may be more inclined to scoop them up, and you will struggle to rebuild your team when the economy rebounds.
4. Leverage an insurance broker
An insurance broker can help you understand the insurance marketplace and negotiate the best pricing and coverage terms possible for a full range of business insurance coverages, employee benefits, and other solutions.
Lodge observes that the customers who are “most successful in mitigating the overall cost of risk” have plans in place for preventing insurance claims in the first place. By communicating these plans to their brokers, they often reduce the amount of insurance they need to purchase.
Additionally, establish a face-to-face relationship with your insurance company. That way, if something challenging happens, you will know “who is on the other end paying that claim,” and they will know you, too.
Lodge believes your insurance broker or agent should help facilitate this kind of relationship building.
Your insurance broker can also connect you to other services and partners, free of charge. At Eastern Insurance Group, these include HR consultative services, online tools for assessing risk, and legal resources.
5. Be on the hunt for opportunistic ways to grow your business
During a downturn, companies may be “a little hungrier” to sell or offload business lines and willing to offer you better purchase prices or terms than you would normally get in better economic times, Tyler says.
Take advantage of these “bargains,” when possible. These deals could help your business emerge from a recession a step ahead of competitors.
He reminds us that market volatility has nothing to do with the underlying quality of a company: a strong business is a strong business, even if its earnings per share are down because of the economic climate. Talk with your banker about navigating acquisitive financing no matter the times.
6. Encourage employees to diversify their personal investment portfolio
Stay on the lookout for deals when it comes to personal investments as well. “If you find a book in a bookstore with a list price of $22 and it’s on sale for $15, you’re probably going to buy it if you’re interested in the book,” Tyler explains. In addition to “bargain hunting,” now is a good time to work with your business’ investment advisor to offer information to employees about reviewing their personal investments and ensuring they are taking a resilient portfolio approach. Diversify, so you have a mixture of investments that will do well in an economic expansion, and ones that will be “a little more defensive during a recession,” Tyler says.
He also advises staying patient and recognizing that “downturns in markets and economies are short-lived compared to expansions in both.”
7. Communicate with your banker
About two-thirds of business customers communicate with their banker frequently, such as monthly or quarterly, Buscone estimates, which is a great way to build long-term business success. Others may reach out less frequently, which could put them at a disadvantage. Regular communication allows your banker to understand your latest business plans and ensure financial needs are best being managed and met no matter the times.
Buscone recalls how a client expertly managed a challenging economic environment by proactively reaching out to share his strategy. His plan was to hold onto talent, even though it meant a short-term loss.
“We as a bank adjusted to that and set up his loan covenants to allow him flexibility. When the economy improved, he was among the best performing companies in his sector in the state.”
He adds, “As a community bank, we at Eastern are focused on doing our best to be there for customers whether they are growing or experiencing a hardship.”
A proactive approach to planning and communication will help your business weather whatever the new year has in store and ensure you are well-positioned as the economy enters a recovery.
Your partners should be proactive, too.
“Expect your financial institution to be thinking about ideas that might save you money right now and position your business for long-term success,” Tyler says.
This shows they value your relationship as something more than a commodity and are invested in the success of your business.
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