“One day, you’re gonna wake up, eat your breakfast, brush your teeth, go about your business. And sooner or later, you’re gonna realize you haven’t thought about it. And that’s the moment you realize you can forget. When you know that’s possible, it all gets easier.”
Mike Ehrmantraut, Better Call Saul
Perhaps our lead quote is a bit melodramatic but make no mistake that when the eventual economic downturn runs its course and a recovery emerges, it will be tough to know when we can stop bracing for more bad news and start looking to more optimistic times. Further, I suspect any newsletter that espouses sage quotes from Better Call Saul should be a good read.
LGA’s Business Advisory Services team remains committed to evaluating available economic data, along with insight we hear from our primary sources, to offer commentary on where we stand within the economic cycle and how this information can be used to help manage both business and personal risks. This issue of Business Advisory Services Market Insight provides updates to previously reported trends, shares new economic observations, and offers suggestions on how to prepare to proactively address the challenges ahead.
“Confidence is good. Facts on your side, better.”
Chuck McGill, Better Call Saul
It can be frustrating to offer commentary on the economy because one is rarely able to offer unambiguous conclusions. As many joke, three economists equal 12 opinions. As a result, we continually revisit our prior observations in concert with new data and events to help ensure that our insight is both defendable and on track. For example, we previously shared what were believed to be leading indicators of economic uncertainty – historic inflation, a major stock market correction, political and economic unrest, and superficially benign banking industry commentary. Since our last Business Advisory Services Market Insight, we are adding the following additional, potentially concerning trends that we are monitoring closely:
- An ascending misery findex
- Rising mortgage rates
- Falling housing starts
- Eroding consumer confidence
- Declining confidence in the housing markets
- Layoffs in the mortgage sector
- Trending reports of possible broad-based layoff’s ahead
- Open discussion as to whether our economy is in a recession
- U.S. distressed debt funds are seeking fresh capital, betting on a recession and an increase in loan defaults
“Saul Goodman is… He’s the last line of defense for the little guy. Are you getting sold down the river? He’s a life raft. You getting stepped on, he’s a sharp stick. You got Goliath on your back, Saul’s the guy with the slingshot. He’s a righter of wrongs. He’s friend to the friendless. That’s Saul Goodman.”
Saul Goodman, Better Call Saul
The key takeaway is that we are always in the midst of an economic cycle and the most effective business leaders adapt to their current environment by taking actionable steps to protect their businesses. Here are measures LGA’s Business Advisory Team is implementing for our clients to help them prepare that you can consider for your business:
- Preparing projections for the remainder of 2022 and for the full year of 2023 that predict revenues and profits, as well as specific cash needs over each period of time.
- Developing various forecasted scenarios to represent a host of outcomes in order to quantify how resilient or vulnerable your company may be.
- Monitoring key ratios that lenders and stakeholders will hone in on and prepare our clients to initiate proactive discussions should these results fall short of expectations.
- Assessing by how much your company can miss its forecasts yet remain at a minimum breakeven or in compliance with bank covenants.
- Evaluating all fixed and variable costs and determining which levers to pull should declining revenues or rising costs threaten viability.
In addition to the block and tackle tasks above, you can also consider:
- Familiarizing yourself with loan document key terms, covenants, events of defaults, rights, and remedies.
- Creating contingency plans to access alternative sources of lending should a new lender be immediately needed.
- Aggressively track receivable quality, inventory days on hand, and the timing of scheduled payments to vendors.
- Derive a strategy, where possible, to pass along cost increases to your clients to help maintain profit margins in an inflationary environment.
- Opportunistically acquire competitors or evaluate the sale of your company.
Please remember you do not have to implement these steps alone. If you are interested in learning more about how you can prepare your business for an economic downturn or just have questions about information in this Market Insight, reach out to the LGA Business Advisory Team.
Over the coming months, we will continue to share what we are hearing, and we welcome insight from our readers. The most insightful reader feedback will be the recipient of some really terrific LGA swag.
LGA BAS Team