The Fed’s recent rate hikes indicate that we’ll likely experience a recession heading into next year – which means that, on top of the pandemic, rising inflation and increasing interest rates, business owners are looking at another year of elevated uncertainty.
Whether you’re in a sector like energy and travel, which could benefit from current economic dynamics, or one particularly challenged by this environment like housing, all business owners should be working on contingency plans given what the events of the past three years have taught us.
In the face of a potential recession in 2023, what can business owners do now to mitigate its impact and remain as financially healthy as possible?
Evaluate your business’s preparedness by asking these questions:
What are your risks, and what can you do about them now?
Understand that any liability your business is facing now could be amplified ten-fold as the result of a recession. This includes cash flow issues, inadequate insurance, personnel risks, supply chain management problems – the list goes on. What may seem like a minor problem at the moment could have a much bigger impact on your business than you might anticipate over the next year, so use this time to identify and address your current risks.
Are you experiencing higher costs of input or labor?
As a result of inflation, supply chain and labor shortages, and higher interest rates, most small businesses are. Consider whether you need to absorb these, or if they can be passed onto your consumer without impacting your profitability. If you’re in a must-have industry, customers will likely notice the increase in prices but pay them anyway. In a nice-to-have business, though, it’s possible that increased costs will deter purchases. Weigh the balance you’re willing to strike here carefully.
If you are in a service industry, can you employ and retain enough employees to serve all of your potential clients?
Preparing your business for a potential recession is largely about making difficult decisions without all the necessary facts. In this case, do your best to project the number of clients you think you’ll need to serve in 2023, and the number of employees that makes service viable without overshooting on payroll or significantly understaffing your resources.
What is your base case, and what are some other possible scenarios?
The base case now seems to be that interest rates and inflation will start to normalize in mid-2023, but that a recession may have already begun by then. Whatever your base case is, spend most of your planning time around this scenario, but don’t ignore or overlook the other scenarios that may exist for your business, such as costs to build your team, produce your product, and serve your clients, as well as potential opportunities these scenarios might create for you.
The key is to set aside time to think through the scenarios before they happen, so that whether you’re presented with a risk or an opportunity, you have a strategy on deck ready to execute.
Is your longer-term planning up to date?
We know from the new clients that joined us this year that the pandemic forced a re-examination of their strategic, longer-term goals, timelines, and plans, from retirement to health insurance to charitable giving. In short, it was a wake-up call to take a closer look at their lives and potential roadblocks standing in the way of reaching their goals.
For business owners, this is especially important, since your business is most likely your largest asset – meaning that it represents a concentrated risk in your overall net worth. Even in years with more stable economic conditions, you should be regularly evaluating whether your key man and disability insurance coverage is still adequate, if your buy-sell funding agreement needs to be updated, and whether there have been any changes that need to be reflected in your succession plan.
In light of today’s uncertainties, the right decisions for your business and ultimately your own financial well-being aren’t always clear. With our entrepreneurial experience and extended network of business specialists, BFS Advisory Group is uniquely equipped to help you navigate 2023 and beyond. Click here to learn more about how we support business owners with a suite of financial planning and investment solutions.
BFS Advisory Group | 8201 Preston Road, Suite 400 | Dallas, TX 75225 | (214) 764-1964
Securities and investment advisory services offered through FSC Securities Corporation (FSC), member FINRA/SIPC. Financial planning services offered through BFS Advisory Group, LLC, a registered investment advisor. Insurance is offered by Debra Brennan Tagg as an independent insurance agent. FSC is separately owned and other entities and/or marketing names, products or services referenced here are independent of FSC.