Business Owners: Looking Ahead to 2023 and How to Prepare for What's Ahead

What's Around the Corner?

As a business owner, you look forward to ending this year on a positive note and planning for next year. Preparing a projection is essential, but it may present challenges many business owners have not encountered, including rising interest rates, inflation, and a possible recession.

Rising Interest Rates, Inflation, and Recession

Interest rates are the highest since 2009 and may remain high in 2023.

Federal Funds Effective Rate - Interest Rate Trends

Inflation forecasts suggest we can expect relatively high inflation for much of 2023.

Inflation Forecast - OCED

We may be headed for a recession.

"Goldman Sachs Chief Executive Officer David Solomon told Reuters. "There's a reasonable chance of a recession in the U.S., but it's not certain," Solomon said on Tuesday after the company released third-quarter earnings. "I could still see a scenario with a soft landing.""

Source: Economic Times, Goldman CEO says reasonable chance of U.S. recession in 2023

 "Runaway inflation, big interest rates hikes, the Russian invasion of Ukraine and the unknown effects of the Federal Reserve's quantitative tightening policy are among the indicators of a potential recession, he said in an interview to the business news channel. "These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they're likely to put the U.S. in some kind of recession six to nine months from now," Dimon said."

Source: Reuters,   JPMorgan CEO Dimon warns of recession in 6 to 9 months - CNBC

"The Conference Board predicts a 96 percent likelihood of a recession in the U.S. within the next 12 months, based on our probability model. This supports our expectation of a recession before the end of 2022 caused by the Federal Reserve's interest rate hikes. The last quarter of 2022 and the first quarter of 2023 are likely to see negative real GDP growth rates."

 Source: U.S. Recession Probability Reaches 96 Percent Heading into Q4, The Conference Board

Preparing to Meet the Challenges

Business owners should plan early and be prepared to execute rapidly. You can take the following steps to ensure you are ready for whatever the next year brings:

Get a Clear Understanding of Your Cash Flow

Understanding your expected cash flow is essential to navigating these challenges. Prepare a 13-week cash flow forecast and update it at least monthly; weekly updates are ideal. For cash flow projections beyond one quarter, you can use a full-year financial forecast which we will address later in this article.

Review your accounts payable and receivable terms and the timing of customer collections and vendor payments. Implement procedures to speed up collections and slow down payments to vendors if needed. Customers may start slow-paying so having a good collections process is essential.

Re-Consider Capital Expenditures

That project or significant capital investment you were considering may no longer make sense. Why? Your hurdle rate is going up, and the IRR of your investment now must assess additional risk. The changes in two inputs into your capital investment decision may mean it's time to pause or scrap some investments that made sense a year ago.

Forecast - Best, Good, Worse Case Scenarios

We are heading into uncharted territory. In hurricane terms, this could be a Category 1, a Category 5, or somewhere in between - plan for a range of scenarios. Prepare a forecast with key inputs of best, good, and worst-- case scenarios. Prepare to act soon as you see the direction you are heading in. Hesitation means lost cash flow which may be detrimental to your business.

Review Compensation

Consider compensation adjustments that will give you flexibility. For example, offer a bonus based on company performance rather than raises. If we have a worst-case scenario, you have built-in savings when your results don't meet projections. Also, consider non-cash compensation as an option for critical employees.

Cut Costs Accordingly

As mentioned earlier, you may need to cut costs. How deeply you may not know now, but early preparation will save you critical cash flow. A plan will also give you time to consider how to approach your cost reductions in line with your overall strategy.

Align Debt With Your Forecast

Review your debt financing terms. Do you have balloon payments due soon? Variable-rate financing? Will you need a cushion for seasonality or working capital?  

Now is a good time to meet with your lenders and work out the best terms. Financing costs and terms are still reasonable. Lock in good terms while you can. If we have a downturn, borrowing money will be more expensive, and capital will be less available.  

Consider getting a line of credit or additional financing if your projections suggest you need it. Taking on additional debt may seem counterintuitive, but you want to secure flexible financing that will meet your needs while you still can. Make sure you are able to make principal and interest payments and meet covenants even in a worst-case scenario. A line of credit that you can tap if needed may be ideal.

Financing is bound to tighten if we have a recession. Prepare accordingly.

Expect That Equity Investors May Require More

If your financing includes equity investors, their cost of capital is increasing, so their required ROI will also increase. Now is the time to meet with investors and clarify their expectations about future financing rounds.

Revisit Your Exit Plan

Review your portfolio, personal goals, and your exit strategy. Business buyers have not disappeared, but their risk tolerance is decreasing, and their cost of capital is increasing. This change in how they evaluate investments may impact your exit plan significantly. Remember, the two parts of their valuation equation are Cash Flow/Risk. Your goal should be to do everything you can to mitigate business risk. Buyers may require more stringent earn-outs and terms that minimize their risk. By working now to reduce your business risk, you will have greater control over your exit terms and the ability to meet your personal financial goals.

Identify Opportunities

Good companies take advantage of opportunities presented by downturns. You may be able to expand market share into areas when competition reduces their footprint. Merger and acquisition opportunities may include discounted valuations for distressed firms. Labor may be more readily available. By identifying opportunities early, you can take advantage of them to increase your company's value as business conditions improve.

Conclusion

We can expect business conditions will be difficult next year and possibly beyond. As a business owner, you can navigate the bad times and be well-positioned for the turnaround.

ABOUT US

Highpoint CFO is a CFO consulting firm based in Tampa, Florida that serves clients throughout the U.S. 

Scott Young is the President and Principal Consultant at Highpoint CFO. He is a CPA, Certified Merger & Acquisition Advisor (CM&AA), and Certified Value Growth Advisor (CVGA) with over 25 years of experience in finance and accounting at industry-leading companies.

Like most small or mid-sized businesses, you don't need a full-time CFO. Our on-demand CFO service is the finance and accounting expertise you need to reach your business goals. We serve companies from early-stage to growing businesses through getting ready to sell. We are a fractional CFO consulting firm based in Tampa, Florida. We offer remote (virtual CFO) and in-person CFO and accounting consulting services to clients throughout the United States.

How We Can Help You

Highpoint CFO provides CFO consulting services. Contact us to learn how a fractional CFO can help you with financing, forecasting, cash flow, accounting infrastructure, working capital management, by-product profitability reporting, and data analysis using business intelligence tools such as Power B.I.