Well, I’m not sure. And no one else appears to know either.

But here’s the reality. There are a lot of tea leaves, breadcrumbs, or signs that seem to be
pointing in that direction.

Why is it important for us, as small business owners, to keep an eye on potential indicators? One key reason is so we have some time to prepare for the next one, unlike the jolt we got in the Spring of 2020. We were required to shut down immediately for a far longer period of time
than what was initially expected.

Preparation time is not a bad thing. Smaller (typically private) companies, unlike much larger or publicly traded companies, do not have the capital reserves to sustain their businesses any more than 3 to 6 months if the economy tumbles. Unfortunately for many small companies, it is far less time than that. Following are some things we can do to help mitigate the ravages of a lengthy downturn.

1. Meet with your accountant to get a professional perspective of what your working capital position is. Hint – just like the valuation of your business, your working capital is likely not as strong as you might think!

2. Meet with your banker to find out if you can restructure any existing loans for longer terms or lower interest rates. Or to find out if you qualify for a new loan at this time.

3. Meet with your attorney to determine if there are any contracts or ‘agreements’ that could be restructured if necessary. Especially contracts/agreements that have payment terms, either outgoing or incoming that would be beneficial to alter in case of a business downturn.

4. Consider having a part time business that could be scaled if needed. Not every company is going to be handed the opportunity to make masks or ventilators. A second source of income that be expanded when needed can be greatly beneficial if the primary business’s earning power has been compromised. {Personally, I’m considering obtaining a real estate license. This license enables the holder to receive a commission for any real estate transaction the holder is a party to. A real estate license could be of value to my business because clients I work with are prone to engage in commercial real estate transactions, transactions I could be a party to.}

The official definition of a recession is two or more quarters of declining GDP (Gross Domestic Product), coupled with several other factors. For SMBs (Small and Medium Businesses) like mine, the definition of a recession is much simpler. Revenue and profitability begin to decline and keep declining in an atypical fashion. Customers become late payers. The next engagement we believed was going to be started in the next two weeks suddenly vanishes. And our cash flow begins to suffer. For smaller businesses this could begin to occur 3 weeks into the first of the Government’s two month or longer measurement cycle.

Following are some breadcrumbs, tea leaves or signs you can check on that may tell you long before the GDP cycle confirms what you already are experiencing.

1. Keep an eye on how the major stock markets are doing. If they are closing lower more days than they are staying stable or growing, that’s usually an indicator of either a downturn or a ‘correction’ (which can be almost as bad!). If investors are bailing on stocks, their believe is that either bonds are a safer investment, or that they’re going to sit on cash. Neither of those are encouraging signs. Also, the stock market has almost always preceded the actual upturn or downturn well in advance of the actual downturn or growth spurt.

2. Occasionally read some intel that will tell you whether or not the experts think the stock market is ‘overheated’. That can be a little tricky because of the number of factors involved in that analysis. But over time, if most experts are saying the market is overheated, you can almost count on a correction (at least) occurring, if not a recession.

3. Pricing of goods and services. This one is easy to track since all of us are consumers! Prices of virtually everything are UP! The question is, how much further are they likely to increase? Rising prices without an increase in value leads to the dirtiest of dirty words – inflation. Ultimately inflation leads to an increase in interest rates by the FED. Increasing interest rates tend to do two things. First, capital becomes more expensive, and second, inflation tends to hold or subside – but not without a cost to the economy.

4. The minimum wage issue. While a legitimate issue, right now is not a great time to deal with it, as prices are already rising faster than desired. Broad Government mandated increases in compensation will further increase the cost of goods and services. This will result in an increase in consumer costs for goods and services. Since income for most people is largely fixed, spending will decrease – which furthers the economic downturn.

5. Health care costs, including medicines. Unfortunately, there is no good news on this issue now. The question is will these increases level off or continue to increase?

6. Supply chain. Right now, it’s in trouble. The Truckers Association estimates the industry currently needs at least 60,000 long haul drivers. An astonishing number! This shortage means needed deliveries will continue to be delayed at best. Delays or non-delivery creates scarcity, and scarcity creates rising prices.

7. Unemployment numbers. This one is a bit tricky, because there are a lot of numbers claiming to be the “official” amount. Consider checking with several sources. There are a few things we do know at this time. New hires are not meeting monthly expectations. This means the economy is not growing currently at expected rates. At best it may be holding steady. We also know the construction industry lost 30,000 workers last month. This is attributed to a lack of timely delivery of materials for new housing. Bad news at a time when housing is both overpriced, and the fact that the country is 500,000 units short of expected demand.

In closing, there are a lot of negative signs re: the direction of the economy. We might recover, we might stay stagnant, or we might head toward a recession. The point is it is prudent to be aware of what might happen and begin to take needed steps to survive if the worst case occurs.

©June 17, 2021
Business Development Associates, Inc.