Ready for recession

Prognostication is a fool’s errand. In predicting the future, we have only a 50 percent chance to get it right. With that said, there are two things of which we can be certain: (1) what goes up, comes down and (2) change happens.

From people who study these things to those of us in the trenches who live it, we share a common thought: at some point, the robust economy we’ve all been enjoying will shift.

Some experts point to the second half of 2019 or the first half of 2020. Some think that we aren’t going to have an adjustment until 2022. While we can’t plan for an exact pivot, smart CEOs know from previous recessions that it’s never too early to plan ahead. Here are five ways to prepare for uncertainty:

Service Mix.

Do you have strong recurring revenue? How will an economic change impact your customers’ need for construction or design/build? If you are overly reliant on a small number of customers or a project-driven business model, now is the time to strengthen your maintenance service and diversify your customer base to reinforce your revenue streams and increase your business value.

Customer Loyalty.

If your customers remain loyal because your service is exceptional, your business is less likely to suffer if times get tough. What are you doing to develop brand loyalty, retention and relationship-building? One of the best ways to get your customers to remain loyal is by finding out how they feel about working with you. Invest in customer engagement surveys and feedback interviews, and develop retention and customer recovery plans as precautionary and proactive measures.

Wages.

In our strong economy with low unemployment, wages are accelerating – not only for field labor but also for managers. During the last half of the 2000s, manager salaries reached unsustainable levels. A similar pattern is happening again.

When the recession hit in ‘08, companies had to cut costs and high salaries became an issue. Alternatives were not good: cut pay or lay people off. Dismantling the team that made you a success is a wrenching alternative. Reducing staff and wages may yield short-term results but will cost in the long-run.

The search for talent in a tight labor market puts your high-performing managers at risk. The natural reaction is to increase pay. A better way is to create an incentive- and performance-based compensation package. As hard as it may be, you have to hold the line one way or the other, or history will repeat itself and you will face the difficult issue of cutting costs and compromising your talent backbone.

Balance Sheet Ratios.

Manage cash flow and cash flow projections, and make sure your balance sheet ratios are sound. I also recommend not purchasing new equipment unless it is absolutely necessary and seek concessions from current suppliers for value.

Improve receivables, offer discounts to shorten payment cycles, get deposits, issue invoices promptly and track receivables closely. Keep a lid on overhead.

I remember many owners saying after having to make significant cuts to overhead during the last recession that they would never let that happen again. Unfortunately, the lesson is wearing off as overheads are creeping up again. Think now about making smarter financial choices, preparing for multiple outcomes, and staying lean to help you respond more quickly and effectively when conditions change.

Improve Communications to Employees.

Times of uncertainty breed low morale; low morale breeds distrust and weakened engagement. Step up your communication to alleviate stress, anxiety and to keep people focused on pulling together, no matter what. There’s a reason for playing the long-game. Companies that pursue the big picture, versus companies that think transactionally, are companies that inspire loyalty and motivation in customers and employees – a potent prescription for good times and bad.

When you prepare your business for next year, include contingencies for slower growth. Invite your advisors, consultants and financial planners to bring context and strategic foresight to the process. Be prudent and proactive and have a strategy to manage change, regardless of what happens.

Bruce Wilson is principal of green industry consulting firm Bruce Wilson & Company.