Globally following the highest inflation in more than four decades, we're entering what many call a recessionary economic market. The recession predictors are causing great debate on the current state of our economy, as unemployment numbers are decreasing despite two straight quarters of US GDP decline. By the technical definition of an economic recession by NBER (National Bureau of Economic Research) or not, we're entering the 3rd round of challenging economic trends for business leaders and the everyday employee after the COVID-19 recession & the 2022 inflation.
Pause and Assess
In previous weeks, "We'll be slowing down our hiring as we're assessing our workforce needs after rapid growth to maximize global productivity and efficiency of our teams" has become a shared party line in addition to unfortunate layoffs at the largest employers. This section isn't to speak to layoffs as a recommendation, but it would be unfactual to not mention the industry trends alongside the hiring freezes & slowdowns.
Over the last two years, organizations of all sizes have been executing hiring sprees to meet demand, accelerate the scale & development of their products, and recoup pandemic turnover. Amazon was a leader in the pack of hiring across its warehouse, distribution, technical and corporate roles, with over 500,000 new jobs in 2020 alone.
We see in the industry-party line statements a need to assess and align workforce roles & responsibilities and forecast a payroll budget against unpredictable potential drops in revenue. These should be two major priorities for the senior leadership team in your businesses—a critical workshop rallying your leaders in finance, operations, and human resources.
You're looking to answer these questions:
- Are the roles and responsibilities of each team member aligned with our organizational goals and adequately staffed?
- Are we seeing the necessary productivity, efficiency, and traction in achieving the goals with the current headcount and organization structure? If not, is it because
- We're overstaffed, and everyone doesn't have work to do?
- We're understaffed, and there's a backlog of work to be done?
- We're adequately staffed but not properly organized, and some teams are overstaffed while others are significantly understaffed.
- If revenue drops 25-40% from the original forecast for Q4 2022 or FY23, what are the critical roles and teams required to move the core business forward?
Recently, this is a conversation that both Google and Facebook began to have with their teams, ultimately needing to drive an increase in productivity and focus.
Rebalance & Stick to the Budget
As we look at Q4 2022, in addition to inflation driving an increase in business cost, leaders should look at their Q4 revenue forecasts for unplanned non-renewals, contract cancellations, or decreases in sales. FY 2023 is even more unpredictable as every business will likely do the same exercise, aggressively planning for uncertainty. (Some organizations with in-house economists will have better planning and foresight into this planning process, while some will make varying predictions.)
Senior leadership should be spending time with the entirety of their workforce to walk through the current environment and planning that they're taking as a company to support the emphasis of tighter budget discipline against expenses of all levels. Additionally, as opportunities exist, businesses should aggressively allocate cash to their' emergency funds or cash accounts. Finally, while inflation is still at its' highs, it would be advantageous to revisit expenses that have increased beyond the historical averages, such as business travel.
Manage Debt Load & Capacity
The worst time to be operating with high debt loads compared to your debt capacity is at the start of an uncertain economic cycle, a la this "recession." But, of course, this is a statement to operate from preceding a recession, so it may be too late for some.
As interest rates are decreasing from June highs, businesses and their finance functions should explore increasing potential debt facilities to handle necessary expenses if income falls. It's common for companies to plan for 2-6 months of decline in cash flow; however, the average prediction of the length of this recession is 18 months.
Client Focus
We spend considerable time planning finances around the worst in client and customer declines impacting revenue, while ultimately, client conversations are equally as important and should be happening in parallel.
Naturally, this is when the accounting department' accounts receivable team will get their salaries worth as they pursue aging client invoices. Now while that will have a short-term benefit to bringing cash into accounts, businesses should be focused on conversations with clients to understand their needs and to maintain relationships in this economic cycle. Clients increasingly paying slower over time are on the edge of canceling their relationship or not renewing based on financial challenges.
These are conversations and questions that you should be having with clients:
- How is your business right now?
- Do you foresee any immediate financial complications for your business?
- Can we offer extended invoice net arrangements or provide early/timely payment discounts?
- What are your needs to make a compelling case internally for our renewal?
- Do we need to offer a reduction in our fee for some time or the entirety of the contract? (i.e., 10% discount in Q1FY23 if you'll commit to the entire year)
This mini recession playbook is not a comprehensive or exhaustive guide on recession planning for businesses; however, it's a piece to start the necessary conversations. Foresight and planning are crucial steps for businesses and individuals navigating uncertain and challenging economies. So gather your leadership team, your accounting firms, and groups like Flare Partners to begin that planning process.
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