A recent poll of your Finance pro peers had 36% preparing their organization for a recession, 25% still deciding whether they should take steps to get ready and 39% not actively preparing for economic downturn. The poll was conducted during a webinar presented by financial planning and analysis platform DataRails.
Opinions are so mixed because economic indicators are contradicting each other. For example, the U.S. GDP declined in two consecutive quarters, yet gross domestic income, which is published by the same government agency that compiles GDP, implies that the U.S. economy has been growing continuously since the end of 2021.
Also, according to the Bureau of Labor Statistics, the unemployment rate is 3.7% – just 0.2% above the 50-year low in February 2020, right before COVID-19 shook things up.
Meanwhile, the job vacancy rate is at an all-time high – 6.9%, or 11.2 million openings, as of the last business day of July. In addition, nonfarm payrolls rose by 315,000 jobs in August.
However, for Q3 2022, 63 S&P 500 companies have issued negative Earnings Per Share (EPS) guidance, compared to 40 S&P 500 companies that have issued positive EPS guidance. That’s according to FactSet.
But that same report indicated that corporate earnings in Q2 2022 were strong, with three-quarters of S&P 500 companies reporting a positive EPS surprise and 70% of companies reporting a positive revenue surprise.
CNBC reported that while the economy is showing signs of slowing down, economists are divided about the risk of a recession.
Recession preparation plan
Like severe weather events, there’s always a chance a recession will come along, and it’s why insurance company Allianz Trade says it’s smart to:
- Build a cash reserve with six to 12 months of operating expenses.
- Encourage A/R to communicate early and often with companies that owe you money. Your people need to remind these customers how important they are to your business, making sure they understand your billing practices and are connected with your team on a personal level. That way, when they pick which bills to pay first, your company’s invoices will always be on top of the stack.
- Ensure payments to creditors are made on time or early if possible. This may give you some leverage if you need to renegotiate credit terms (e.g., net30 or more), push for discounted terms (e.g., a 2/10, net30 early payment discount) or expand your lines of credit.
- Thoughtfully reduce your expenses. Some moves you can make right now include renegotiating the lease for your office space (or looking into a flexible work space), shopping for less expensive office supplies and re-evaluating what services are absolutely essential for your business to survive.
- Carefully examine your staffing needs, and make sure that any changes you make won’t hinder your staff’s ability to serve your customers or decrease employees’ morale.
- Optimize inventory management. Talk to your suppliers and create a plan to ensure more inventory turns over so your inventory doesn’t stagnate. If you’ve spoken to them about credit terms and can show them you have a plan, your suppliers will be more willing to work with you to ensure success.
- Secure financing before you need it. Having a good relationship with current and possible future lenders is an important strategy for supporting your working capital needs. These relationships also provide your company the flexibility to weather a recession or capitalize on opportunities. When your banker knows your company well and believes in your strategy, it can open up possibilities for business growth.
Not too late to start prepping
While planning for the unknown may be like driving through thick fog at night, Sean March, a senior financial planning and analysis (FP&A) strategist at DataRails, said that using spreadsheet-based scenario analysis may be the key to budgeting and forecasting to help your company through a recession, even if the bumpy ride turns out to be a short one.
A strategy that he shared during a webinar titled “How Finance Teams Can Plan for a Recession” involves keeping three different planning versions (Scenario A, B and C) of spreadsheets that break down your profit and loss, cash flow and balance sheet data where you can line up different cost assumptions with data to see what the potential impact would be on the budget.
“So if you see a specific cost going up, or specific revenue projections change, you [can] easily see the effects of those changes,” March said.
Scenario analysis spreadsheets can also be useful for hiring and salary planning. For instance, what would the financial impact be from hiring five new people or 10 new people? Or what would it look like if you gave 5% raises or 8% raises?
March noted that there are FP&A tech tools on the market that integrate with Microsoft Excel and can put your business in a better position to pivot with changing market trends, including central databases for tracking accounting, operational and payroll data that’s key to scenario planning.