What actions should you take to prepare for challenging economic times? It’s been said that God invented Economists to make Astrologists look good. No one knows what will happen in the economy, but at the moment there are a number of signals that indicate challenging economic times might be ahead.
We discuss 7 actions you can take now to prepare for challenging economic times.
Seven actions for challenging economic times
Episode 115 – The Growth Whisperers
The Growth Whisperers is a weekly podcast hosted by Brad Giles and Kevin Lawrence two advisors to mid-market businesses, one Australian, one Canadian, who each work with CEOs and Leadership Teams across the world with a mission to build enduring, great companies. Each weekly episode covers interesting situations and questions from the world of strategic planning, leadership development, talent and hiring in high growth entrepreneurial companies where real results matter.
Seven actions for challenging economic times
Kevin Lawrence 00:13
Hey, welcome to the growth whispers podcast where everything every week that Brad and I talk about is about building enduring great companies in good times, and exciting times, and sometimes potentially, in bad times, no matter what it’s to endure. So I’m Kevin Lawrence here in Vancouver, British Columbia, Canada, and I’m here with my co host, Brad Giles, down in Perth. Awesome. Australia, Brad, how’s it going?
Brad Giles 00:38
Pretty good today. And we said that a lot. I know. Why don’t we I didn’t know we needed we could expand
Kevin Lawrence 00:43
our vocabulary. Maybe we should just say as dreadful. That’d be, that’d be fine. No, I don’t I only want to see the words it doesn’t feel good. And it’s all right.
Brad Giles 00:55
Look, you know what, like, We’re doing great work, we great teams, and have very, we’re very fortunate to have alliances. So you know, I think it’s fair to say, you know, broadly, we’re fortunate, we’re happy, we’re lucky, let’s move on.
Kevin Lawrence 01:12
Most days are good days. But that’s what we choose. And we are very, very fortunate to work with awesome people doing great things in the world. So hey, before we jump into the show, if you haven’t subscribed yet, please hit that subscribe button happy for you to give us a nice rating as well, especially if you consider if the show was good. So we’re gonna dig in today. And two, interesting topic. Brad was up front there talked about good times and bad times and uncertain times, even today, we’re talking about?
Brad Giles 01:43
Well, look, we had a chat before the show. And we’re beginning to see a couple of interesting things coming through. The stock market has had an interesting run since the beginning of the year, certainly, in the tech sectors, we’ve seen some interesting times with some large changes in valuations. And I’ve got some clients in the tech sector, they certainly talking about that we’re beginning to see it in some other areas of the economy. You know, there’s a war in Ukraine, as we know, there’s been a massive stimulus through most governments around the world in the COVID areas. And that’s shut valuations up. There’s, you know, you go and sell or you go and buy or sell a secondhand car that can be selling 30 40% above what was previously worth because of shortages and so forth. So yeah, we’re talking about we don’t we’re talking about
Kevin Lawrence 02:51
what goes up, often comes down at least for catches a bit of a breather.
Brad Giles 02:56
Yeah, yeah. So we don’t know. But we’ve seen enough recently, to say maybe it’s time to do an episode on the seven actions for challenging economic times. You know, maybe it’s time to start putting some nuts away. The winter. I don’t
Kevin Lawrence 03:19
know what that means now. But the squirrels, that squirrel squirrels, okay. Oh, my God, it Yeah. So I think anyway, the thing is, we always, you know, Jim Collins calls it productive paranoia, we always have a good dose of productive paranoia and being ready for whatever comes. And now it’s just a little more time to be a little more prepared. It’s pretty clear on the horizon, something funky is going on. And some people think we’re already in recession in North America, some of the CEO I’ve been on a tear the last few weeks talking to a bunch of different CEOs about what they see in their businesses, and many businesses are showing signs of moving into recession. And thankfully, you know, we work with many enduring great companies that have been around for 3040 5060 7080 90, over 100 years now. We have in our portfolio of clients, and within those they had been through all kinds of economic downturns, all kinds of ended up terms of I want to be clear, and I was talking to a CEO, but today I think the best opportunities come in economic downturns. Yeah, for sure. It’s like if you’re on your game, and you’re focused and you have a strong team, a clear strategy, good preparation. It wipes out the weak players, like I’ve learned on my first time, I was through an economic downturn, I was concerned. And the first serious one that I experienced. Really services one Otho a little bit in 2000. And then oh, 789 in that range, whatever. It was really the Oh 808 ish. Yeah, and um, I was working a lot in the Middle East and the downturn, there was just a, it was like a mountain slide. It was incredible. But the point of it is, is that awesome opportunities come through for great operators, great disciplined operators with long term perspectives do usually very, very well. So it was a good things will come. And you know, the idea is, with all this stuff going on, you’re better to have a great plan B No matter what, it never hurts, as long as you don’t slip into what I call, you know, a situation where you kind of create your own self fulfilling prophecy of killing your business. And it’s almost like there’s a story of, obviously, we sometimes we like to pick on accountants on this stuff. But you know, the accountant says, We got to cut the marketing budget, which sometimes we all should say, you know, we got to cut the marketing budget, we’re spending too much and you know, tough times are coming, so we better cut the budget. And then they cut the budget. And then you know, lo and behold, sales slows down.
Brad Giles 05:59
But don’t they never say we should cut the accounting budget? Funnily enough, it’s weird
Kevin Lawrence 06:02
how that works. It’s very weird. Yes. But the point of it being is that, you know, sometimes you can anticipate a problem, overreact to a problem and create a bigger problem. Yeah. And so you know, you got to stay opportunistic. And that’s one of the things I want to leave around. downturns are good for discipline, resetting systems and everything. And as long as you aren’t crazy over leveraged, it’ll be great. And if you are crazy over leveraged Well, you know, it’s interesting, I went back to one of my clients starting nine months ago, and we were looking at his balance sheet, and I’m like, Ah, this is not okay. Not in a boom time to have the balance sheet he had, and we started working on this aggressively nine months ago, and He’s way better. So
Brad Giles 06:46
you had a lot of debt is what you’re implying there, right, or he did have a lot of liquidity. He had,
Kevin Lawrence 06:53
he had a lot of debt, no liquidity. And he was not he was in the shape to thrive if the economy boomed and not if it changed, like he had way too much success that was at risk. It wasn’t structured, right, which we believe in his team to miss team did most of the work one of the one take credit for point of it is, there’s lots of great things to do. And you got to look continue to keep your eye on horizon of opportunity is I just want to frame these
Brad Giles 07:23
KYV. Every time we do a podcast, we start by saying we’re all about building enduring great companies. So you can only have an enduring company if you survive. Okay,
Kevin Lawrence 07:35
doesn’t matter if you’re great. If you can even survive, you can under
Brad Giles 07:39
everything that we talked about is enduring. So you became any one of these episodes? It’s framed around? Yes, you’ve got to. So if you, you know, I remember, in 2000, the tech crash the tech bubble. And it was, it was out, it didn’t make any sense. Okay, companies would come up with an idea, and they’d raise money. And there was no underlying logic to what they were doing. There was no business model that had any sense to make money. And then they’re the companies that all got wiped out. It is about making sure that we can survive and endure.
Kevin Lawrence 08:24
Yes. And usually, it’s about being a master of the fundamentals and the basics. Yeah, right. Yeah. If you have a fully 100% leveraged balance sheet, I mean, hopefully your private equity backed or tapped into something else that has access to more cash. But if you’re a family business, that is fully leveraged, you’re I mean, you’re asking for trouble at the best of time. So anyway, we’ll get we’ll dig into that. But boys, basically, it’s we can’t predict the future. But we need to be ready. And you know, there’s a great quote we got in here. And I believe this is from Warren Buffett. You know, when others are greedy, be fearful. And when they are fearful, be greedy. And right now, there has been a lot of greed in the market and a lot of capitalism at this past, and I love capitalism and lots of ways. But sooner or later that flips, and then you just need to be prepared to be always, you know, thinking differently than the herd. That’s all. So there are awesome opportunities, what we got to be there on the other side. So let’s start with our seven points. Number one, you know, plan to look for a plan for the best look for those biggest opportunities and keep tuned into those. So it’s interesting. Another great see a shout out to BP BP and OVR. Great strategic CEO, one of the best I’ve I’ve worked with in terms of strategy, and he and I had a chat last week and we’re talking about this and he goes, Man, I just see opportunity everywhere. And we start talking about it and he’s listing off I’m not going to give away his playbook, but he Listen up, there’s gonna be big opportunities here, big opportunities here, big opportunities here, big opportunities here. And he’s going through this massive list. And he’s got it, he’s got a master plan, you can, you can see, based on all the stuff, he studies where the opportunities gonna be, and he might not be right and all that, but he’s going to be right on some of it. But more importantly, he’s going to continue to keep him and his teams tuned in onto that. So, you know, the biggest thing we have to fear is fear and losing sight of opportunities, because that can be self fulfilling. So where can you be prepared to win? You know, where are your competitors gonna get weak? Like, where are your competitors, not going to be able to take care of customers, and you can easily require customers or acquire the competitor, who’s already frail. And with a couple little nudges, they’re going to be in, in harm’s way. And you might be able to save them and help them out by buying them.
Brad Giles 10:57
But don’t weaken your balance sheet. By doing that, like it’s it’s easy to get caught up in it. And I don’t know BP and I don’t know his situation. But number rule number one, you must endure, right?
Kevin Lawrence 11:13
He’s got the balance sheet covered.
Brad Giles 11:16
Yeah, as you would expect, but don’t be listening to this podcast thinking, Oh, even though I’ve got a Okay, balance sheet, like I’m going to be able to go leverage to the hilt, and I’m going to acquire market share. I want to just point out one of the episodes we spoke about before, which is, if you’re going to in one of the episodes, we said that if you’re going to acquire another business, or something like that an acquisition of some sort. You’ve got to look at it through the lens of gross profit, how will it change your gross profit margin? Is it going because don’t just buy it to get an up market share? Because this customer might get wiped out? And maybe you can
Kevin Lawrence 11:56
sit on market share is idiotic.
Brad Giles 11:59
But so many people do it, we know that you don’t know any better.
Kevin Lawrence 12:03
You got to look at your gross margins and all the way down to bottom line profitability and how it’s going to help you. Yeah, who cares if you got share, if you lose a bunch of money, shares a volume game, it’s like chasing revenue, it can be okay. But it’s got to be calibrated with gross margin and bottom line profitability. I agree. 100%. Yeah. So I think your point that was very important, but is if your company is doing 100 million a year, and you got 20 million in cash, you might do an acquisition with, you know, five or 10, we wouldn’t use all your own cash anyways. But you might, you know, use 5 million of your cash for an acquisition. But if you’re doing 750 million a year, and you’ve only got 20 million in cash, you probably aren’t, you should probably hold on to that cash and try and build up a little bit more to give you a little more buffer. Again, every business has different metrics and numbers point to that being you don’t want to weaken yourself, you want to be able to hold through the market and make sure you got enough cash to get through to the next cycle.
Brad Giles 13:04
So number two plan for the worst case.
Kevin Lawrence 13:08
So we’ve covered off the positive and all the good stuff. Yeah, flip the coin, where a lot of people go
Brad Giles 13:13
Yeah, it’s the poop sandwich here. Right? It’s like stuff good. It’s, it’s a bit squishy in the middle. She’s so planned for the worst case. Right? So nobody knows what’s going to happen. Economists Don’t you know, Kevin, and I don’t, but with seeing some early signs that are making a site, start thinking about this. So think about, and this is the productive paranoia. Think about what could happen, and how will you react to that? Of course, be careful of self fulfilling, creating your own demise, as Kevin already said, but maybe what if your revenues dealt went down? 20 or 30%? What if there was discounting happening that was driving your price down? And you had to respond to that, reconsider the key parts your profit and loss around these types of changes? And how do you deal with that, to survive, to endure to get through the winter to the spring?
Kevin Lawrence 14:22
And you can look at other variables like well, what if the cost of capital or you know interest rates goes up by two points, or four points or six points, I don’t know. Or employment goes up notably or down, where inflation goes up or down. Again, there’s all these variables that impact your it, maybe it’s the price of oil, maybe it’s the price of grain, price of steel, price of aluminum, everyone’s got different variables, price of transportation. But looking at all those variables that have an impact on your business, one of the companies you work with has done their CFO did a brilliant job, picked six main metrics like cost accounting. Capital I think it was costs oil, inflation or and all that and just mull it over for the next five years. And then we’re gonna the executives gonna make some best guesses of what they think, Yeah, they’ll run scenarios. So that’s, you know, scenarios, p&l hit and then capex, you know, what can you defer or accelerate, maybe there’s capex capital expenditures that you can get done. Now, if you think prices are going up, or you think you’re gonna gain notable benefits from that capital, maybe you get it deployed now, and, you know, get all the financing locked up with the bank. Same thing with fundraising, you know, accelerate your fundraising, get that done now, potentially, as well.
Brad Giles 15:43
There’s a lot of businesses through the pandemic that have been propped up or saved by the government. Yep. And, and there, they might not know it, but they are perhaps not in the strongest position. And any change in the environment, you know, they might have been bad going into the pandemic, they got saved, and then coming out of it, if we go into some challenging times, they’re not going to make it. So you’ve got to plan for the worst case and really be prepared for that.
Kevin Lawrence 16:14
Yeah, for sure. We don’t know if the government is going to continue to provide stimulus. I mean, in many cases, you know, increasing rates to kind of cool the economy off to D estimate do stimulate the economy. The final thing I want to say in this, but don’t forget to lead well and keep an eye on what’s possible. And the opportunities don’t allow your culture to get all negative, right? You got you’ve got to deal with it and confront those ugly issues you have to, but you can’t allow yourself to become a negative fearful culture, because again, that will do damage. So focus on those things. And then make sure you go back to what’s possible.
Brad Giles 16:49
Talk about the vision and the mission of the be hag, where are you going? Why do you exist? All of the important things,
Kevin Lawrence 16:54
all that good stuff. All right. Next thing is to anticipate customer needs just step back, what’s going to change all these dynamics? Where are the new needs, or new demand is going to come from? It’s not rocket science, but there will be different things that pop up in the economy? And what can you think about or just go back to, you know, masks during COVID, or trampolines or hot tubs trough and COVID? Who knew those would be hot, hot items, or, you know, toilet paper as it initially was. And then, you know, just try stuff like try firing bullets or before cannonballs. If you’ve got new ideas, just test them. Make sure you’re seeing if the market response.
Brad Giles 17:34
Yeah, try little things before you bet the farm. And when customer needs change, maybe you can try something and it’ll hit the sweet spot or maybe won’t. Moving on to number four, manage cash, or cash is king, my friend.
Kevin Lawrence 17:53
And Queen Yeah, yeah, and
Brad Giles 17:55
and half of the Regal court. So number one, right? Watch out for bad paying customers. If you’re in a business to business, where you’re providing terms to your customers in a retail environment, or you know, it doesn’t really matter so much you’re getting paid when you transact. But if you’re a b2b. Some times in these situations, your customers might not be managing their cash so well. And suddenly, they were at 14 days, then 30, then 45, and it’s slipping out. So you’ve got to keep a close eye on that. And then know when do we put someone doesn’t matter who it is on to stop credit. When do we say to them, we’re not working with you anymore, to bring your payments up to date be relentless
Kevin Lawrence 18:42
about that one of my clients, that’s the best of this stuff. He said when they I’ve been through downturns with him. And he said his tightest credit tightens up dramatically his credit people become the most important people in the company. Yeah. Because if you don’t get paid, that’s, that’s more than a no, you lose the profitability and the cost. Those are big losses. Okay.
Brad Giles 19:01
So just on that point, we’re going to building a really challenging situation for home builders at the moment. And what the all the trades have done is they’ve tightened up their credit terms to the home builders. And so rather than the normal terms, like 30 days into month, they’re now saying, we get paid the same week that we do the work. And that’s been a massive challenge for the home builders as you can imagine, but smart for the trades. Yeah. Okay. Yeah. So number two, cash is king. So build a war chest. So we’ve been banging on this for 115 episodes. Like you’ve got to have a lot of money put away for when the bad times can’t. That’s the only way you can often get survive or have
Kevin Lawrence 19:50
easily accessible as in massive amounts and equity and an asset you can easily and quickly refinance shown how you need to get it quickly. For sure. Nothing is this Lost excess stuff if you’ve got extra inventory, or extra assets that aren’t active aren’t needed not core, again, use that or just or at least inventory manage it. Well now, you know, especially if it’s gotten a little bit loose, okay, that’s number four managing the cash, it’s critical. Cash is what allows you to enter and stick to your values through riddle. All right, have a plan for your players how you’re going to keep the ones that you’ve got, because sometimes people get a little bit spooked. And you might need to get some new ones too. So plan for how you will keep your best people and keep them engaged. Because if people haven’t been through downturns people can get really stressed by it. And a lot of people haven’t, our economy has been booming for a long time as it has in most countries. And some people may have made some poor personal financial choices and be a little over leveraged a little bit too excited and ambitious. So just be prepared for high, you might need to do some special creative things to help out some of your eight players. And who knows what it is. And then the most important so that you don’t have to do massive layoffs, if it gets really bad, actively performance managing your B players, your toxic A’s and your seats constantly. It’s the time I mean, you should have been doing it already. But in boom times people let this stuff slide. How do you make sure you stay on top of it and performance, manage that. And don’t keep any underperformers in your system, at least you know, treat them respectfully and give them chances. But if it’s not going to work, let’s move on.
Brad Giles 21:33
Let’s move them on. And then number six, ensure your core disciplines are tight. You know, we’ve, I live in a, you know, a cyclical economy mining based economy, right. So it’s always on the way up or on the way down. And what we say is that you lose money at the bottom and you lose money at the top because things are things you know, there’s this one day in the middle of a cycle where it’s this optimal environment where you can make money. It’s a bit of a you know, it’s a bit farcical. But the point being is that things get sloppy. Disciplines get sloppy in a boom environment. And so what we want to do is to know that the way to survive the way to what to do is to bring those core disciplines tight. So that is the meeting rhythm, understanding the data, and understanding the priorities for everyone and writing those disciplines, making sure that those things are getting
Kevin Lawrence 22:39
done. And even some of the cost disciplines they get loose. Sometimes this company scales, just staying tight. And every department has core disciplines, just back to the basics. And you know, in thinking sometimes a little more responsibility. And then finally, if the worst happens, and again, hopefully this conversation is a waste of time, and the worst doesn’t and it doesn’t become, you know, a hard core adjustment. But if and when it does come time to cut, there’s lots of different strategies. And Brad and I have both seen, if you have to make a cut, cut notably deeper than you think you need to and do it once obviously, it’s the last resort, to need to cut people, ideally, if you truly live your values and value your people. But when there are cuts, it’s hard. And it’s not fun at all. It’s also a great incentive to make sure you’re an A or an A plus player for those of you listening out there who are in charge, because then you don’t get cut, we generally almost never cut the A pluses or the A players. Contrary to popular belief, we do everything we can to keep the best one but cut harder than you think you need to and ideally earlier, but the most important cut based on your values. I remember it in the Middle East, and I will never remember the state of the rest of my life. Because I almost threw up in the boardroom. And I’m not joking. We had to make some serious cuts because that market was a landslide. It was incredible. And we went through and I was running the flip chart with the chairman and all of the CEOs Chairman the board and the CEOs in the room. And we’re noting what our strategy was. The last one was people. Yeah, it was like managing inventory managing payables, excess spending, executive compensation, actually bonuses executive conversate it basically but the cutting employees is the last one and we didn’t have to and because they stuck to their values, they wanted to take care of their people that have been loyal to them and that’s what you want to be able to do. Which you have to make a lot of other decisions right not to have to do it and sometimes you can’t avoid it.
Brad Giles 24:44
Everyone who’s been through that challenging situation and come I’ll say close to the wire. Always wish they had cut harder and earlier. Yes, you speak to them and I’ve spoken to a lot of people throw that they always might they always have that wish? Like zip cut based on your values? And yeah, no, that is through those cuts, know what will happen on the other side? You know, yeah, think about three 612 months, what does it look like? And why are we making these tough choices?
Kevin Lawrence 25:20
It’s fascinating haven’t been through organizations have had to make some of these cuts. And it’s not fun and never desired. But it’s actually kind of good for the organization and the soul. It freshens things up. It’s shocking how all of the work still gets done. Yeah, like always, all the work gets done. It’s also why I’m a freak about trying to manage SG and a growth or overhead growth. Yeah, because when your overgrown overhead grows too fast, it also has to get cut. And it’s not, it’s not fun at all. So if the worst case happens, just stare the problem in the face and be aggressive about it. And then you can build rebuild stronger, but hopefully we don’t get there. So seven actions to deal with a potential of an unhealthy economy or an economy that fades for a little bit. So number one, plan for the best look for the big opportunities and how you’re going to thrive and capitalize on it. Keep your eyes on the prize. And then also plan for the worst. What do you got to do to look at scenarios to make sure that your income statement and balance sheet can handle it so you can come out the other side and get to benefit into the next cycle? Anticipate customer needs, predict what’s going to happen and be prepared? You know, what’s the next version of the masks that is gonna go through the roof in terms of demand? And then cash cash cash, cash is king, start managing it now be on it, build it up or otherwise continue on there and sell
Brad Giles 26:44
stuff. Number five is have a plan for a plan is how are you going to keep a player’s? How are you going to acquire a players from your competition when your competition get into trouble if they do. Number six, ensure that your disciplines are tight, go back to meeting rhythms, priorities, getting the right data, go back to the basics. And then finally, if the worst happens, cut hard and cut early. Make sure that you’re doing the right thing and you’re connecting to your values and you have a longer term plan. What are the chat Kevin today? Hopefully someone has got some value out of this. We don’t know what’s going to happen but we know we’re seeing enough signs to talk about it. So this has been the growth whispers we have interesting and some might say worthy of reading newsletters. Each of us Kevin’s is at Lawrence and koat.com Mine is at evolution partners.com.au And also if you’ve enjoyed this episode, you can subscribe and maybe even rate the podcast. It’s been great to chat to you today. Look forward to chatting to you again next week.
Or watch it on YouTube