SBDC – The Squeeze is On!
I probably should not use baseball or stock market analogies when describing current economic conditions for businesses, however they seem to fit right now. Once again, we are at the cusp of fundamental changes in the economic landscape with most pundits believing there is more opportunity to the downside than the upside. We are about to find out if this is so.
Risk and Profitability
The baseball analogy fits for seasonality and describes taking a chance with downside potential (being called out at first) with the intention of scoring a run when your teammate is on third base and needing assistance to get home. Taking a chance or chances are integral parts of being in business, but can be better defined as taking calculated risks than just leaving something to chance. Taking calculated risks can be a way to radically reinvent, rapidly improve, add new ventures or just innovate to create stability and wealth for your business. Calculated risk taking is a fundamental opportunity for businesspeople to take, and one of the primary areas that can create satisfaction for owners. After all, ownership should be fun, right?
In the investment world, a short squeeze denotes an action that increases the value of a stock, forcing many people who are shorting the stock to exit their positions. The ‘squeeze event’ happens and the price of the stock makes rapid gains as a result. Perhaps this analogy is more appropriate to current times as this describes rough economic conditions that develop, but with a happy ending for those who believe in the positive long-term growth and profitability of the economy. I hope that this will be the result of the upcoming recession, should it occur, for all our Southern Oregon businesses.
Your Survival Strategies
The issue really boils down to: How are you going to survive a squeeze or downturn in the economy? When the economy expands, it typically enables growth to occur broadly across most all business sectors. Money flows more easily, and people feel a ‘wealth effect’. In a downturn, we are experienced now to know it can be uneven across economic business sectors, with resulting disruptions and business closures concentrated in pockets. Each downturn or recession has unique characteristics, but in general, the negative effects of recessions are felt most severely in local economies, most often in the small businesses that provide most of the services and goods we enjoy as consumers. From a macro perspective, replacing lost businesses can be lengthy and costly to achieve and is an inefficient use of scarce capital. From a micro perspective, how a downturn will affect your business is only partially known at this time, as the unique characteristics of this potential recession unfold.
What is the solution?
There is not one known solution to what we are going to go through. The best idea is to take every moment you have right now and develop your response strategy. At the central core of this should be a reliance on lean principles.
Some Lean Principles to Consider Adopting
Cash is King; keep as much around as you are able to protect. It is depreciating daily, but will outlast unsold inventory that is lost to spoilage, theft, breakage and obsolescence.
Lean out your inventory. Discontinue low margin or low volume items, unless they are the foundation of your business. (Why would low margin items be the foundation, btw?).
As the duration of an anticipated downturn is not known, being conservative with your daily management practices is key to your survival.
Watch your labor costs and margins. Maintain your margins. They illustrate the health of your business as compared to past performance at a glance.
Understand where in your business profits are made and where they are lowered or lost. Make the needed adjustments in your business to weed out losses.
Do not let your receivables collections lengthen out! Remember you are a service or goods provider, not a banker. Now is a great time to outsource your banking activities to the bankers.
Rest up for the next couple months as you are able. Store up energy for the long haul if we have an “L” shaped recession in our future.
To quote an old saying:
“A recession is when your friends lose their businesses or jobs; a depression is when you do.”
Let’s not let the current uncertainty turn into a depression.
This article was originally written 6/15/2022 just before the FED raised rates by .75%. Conditions in early July are considerably different than what was projected in mid-June, making this advice all the more necessary.
It is easy to read articles and agree or disagree with the conclusions, or decide there is adequate time to adjust should a person realizes there may be something to the advice given. It is really difficult to make a determination not only to accept that it is possible that conditions are worsening, but to motivate and be proactive in developing the strategies that will help you survive should it continue getting worse. This is exactly what should be done right now, to take a proactive approach to risk management and audit your business for resiliency in the face of deteriorating economic conditions, including supply-chain issues that are likely to continue for the foreseeable future. Don’t wait until you can measure the damage done to your business as the turnaround time will be lengthy as a result.
Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: firstname.lastname@example.org or 541-646-4126.
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