Indicators of a coming economic downturn are starting to tick up.
Economists are seeing predictors of past slowdowns, such as yield curve inversions — when short-term bond rates rise above long-term yields; weakness in manufacturing; falling prices of key commodities like copper, zinc and lumber; and a decrease in business investment.
“The biggest news people are responding to right now is the slowdown in economic growth in the second quarter of this year,” said Tom Binnings, senior partner at Summit Economics. “We just set the record this summer for the longest business cycle expansion period. It can’t go on forever.”
Yet many owners are not planning for a future downturn in the business cycle.
While businesses are riding the current wave of prosperity, they also should be positioning themselves for upcoming challenges.
There are steps investors can take to protect themselves in the event of a downturn, a subject the Business Journal explored in the July 19 issue. This week, we focus on how businesses can fortify themselves to survive uncertain times.
In their most recent forecast in April, the economists at Summit Economics pegged the possibility of a recession within 12 months at about 30 percent.
“If we do have a recession, it’s very unlikely to be like the last one,” Binnings noted. “The last one had the name Great Recession for a reason. It had to do with the number of jobs lost and the duration.
“The world is changing on multiple fronts, and quite frankly, the least of our problems is this little nuisance of a recession that might be a year down the road.”
Nevertheless, this is a good time for companies to engage in strategic planning for the future, Binnings said. Here’s what he and other business advisors recommend.
• Evaluate where you want to be in one, two or five years, the reality of getting there and what scenarios, such as a modest recession, could impact your vision. Are there opportunities in those scenarios? “When the world changes, it’s not all gloom and doom; there are opportunities that always emerge,” Binnings said.
• Dive deeper to get a better understanding of your client base and the factors that drive demand for your products or services. “I think that the best thing a company can do is to create a little advisory board of friends and family who aren’t in the day-to-day grind … and to just do some brainstorming sessions and have somebody intentionally challenge your thinking [about] … what you want to see from your market, or your internal processes,” he said.
• Take care of your biggest asset — your employees. “Make sure they know they are valued and have a voice at the table,” said Aikta Marcoulier, executive director of the Pikes Peak Small Business Development Center. Provide benefits they find valuable. “In preparation for a recession, hiring is not the way to go.”
• Watch your financials. “Look and see where you can save money without getting rid of your quality and uniqueness,” Marcoulier said. Get a line of credit now rather than later; banks are already tightening up on loans. If you can, hold off on big purchases you will need to pay on for a while, and start putting savings aside now.
• Review your marketing plan and how you differentiate yourself from other businesses in your market. “When the going gets tough, customers are picky on where they spend their money,” Marcoulier said. “Make sure you have a value proposition you can win a new customer over with and retain the ones you have.”
• Don’t cut back on cyber insurance. “Hacks are hard to come back from as it is,” she said.
• Go back to the basics: Assess the strengths, weaknesses, threats and opportunities of your current business practices. “For example, a simple but effective tip is to make sure your books are in balance,” said Frances Padilla, Colorado district director for the U.S. Small Business Administration. “Businesses can work to analyze both the diversification of revenue sources and operational costs, such as cost of their debts, to prepare for ebbs and flows in the economic cycle.”
• Shore up your existing customer base. You may have to reduce prices to remain competitive in a downturn; adopt incentives such as a loyalty program to keep customers coming back, Padilla suggested.
• If feasible, explore overseas sales as a way to diversify your business. “While headwinds could be facing small businesses in the U.S., they could take advantage of other markets that may be seeing stable or growing conditions in other countries,” Padilla said.
• Seek assistance. “Business owners can always lean on the SBA or our strategic partners, such as Small Business Development Centers, Women Business Centers, Veteran Business Centers and SCORE to assist in mapping out a strategy that works for them,” Padilla said.