Is it Time to Start Recession Planning? LJ Suzuki of CFOShare weighs in

Jim Fitzpatrick:
Sure. So, as entrepreneurs and small business owners, we’re complete and forever optimist, right? We never want to talk about the R word and you know. If you bring up recessions, people say, oh, get away from that. We’re all doing fine, everything’s great, and we are doing fine and everything is great. But I think at some level business owners have got to and they probably do think about, what about a recession? How is that going to impact my business? Whether I’m a florist or a real estate agent or a insurance company or I’m a manufacturer, whatever that might be, it’s going to have some impact in a small business. Look, at the end of the day, it could be a positive impact who knows, but it could have a negative impact. So, talk to us. Why should small business owners be planning for a possible recession?

LJ Suzuki:
Yeah. Well, it’s best practice to always have some kind of playbook in mind for how you would handle a recession because the way recessions work is we never see them coming. That’s just the way that recessions happen. If we could see them coming then generally we find ways to avoid recessions. But right now in particular, a lot of business managers and business owners are thinking about a recession and the reason why is because of what the Federal Reserve is doing, we all know that the Federal Reserve is raising interest rates right now in an attempt to tame inflation. Now in a best case scenario, that results in what we call a soft landing, which is when demand pulls back a little bit but it doesn’t slow down the economy from its growth cycle entirely.

LJ Suzuki:
If we look at how frequently the Fed has been successful at pulling off a soft landing, it’s only 11% of the time, the other 89% of the time, yeah, the other 89% of the time the Fed has triggered a recession. So statistically speaking that’s the most likely outcome of what we’re going into. Now I’ve got full faith in the authorities that they know what they’re doing and that inflation is equally bad as a recession. So we have to pick our demons here. But regardless of what happens as a business owner now is a really smart time to review that recession playbook so that you know what tools you have at your disposal to manage a reduction in demand if and when it comes.

Jim Fitzpatrick:
That’s right. So how does a small business owner plan for a recession? Drill down on that a little bit.

LJ Suzuki:
Yeah. So the first thing you’re going to want to do is make sure that you’ve got some good forecasting tools in place. I think every small business owner should have what’s called an operating forecast, which is just next 12 months profit and loss statement, balance sheet with some assumptions that you can kind of change and tweak to see what happens if growth slows, what happens if growth stops entirely, what happens if we have 30% reduction in sales, that type of thing. And you should take this tool, get together with your managers or your advisors and run through some scenarios and talk about how do we respond to a 20% reduction in sales? How do we respond to a 50% reduction in sales? Oftentimes it involves things like delay purchasing or not hiring new employees, sometimes you have to restructure and lay off employees. These are really hard conversations to have, but their important to have so that you know, what the levers are and what the consequences of those levers are.

Jim Fitzpatrick:
That’s right. Or maybe holding off on jumping into a brand new building or a brand new office suite or what have you. Maybe put that on the back burner for now. Right?

LJ Suzuki:
Exactly. Oftentimes those types of investments get deferred in order to preserve your cash and understand what’s happening. On the other hand, if you have a lot of cash right now and you’re in a pretty healthy position, now might be a great time to buy a building during a recession or acquire a competitor or hire a bunch of talent that normally is very expensive and difficult to find but is much easier to find in the midst of a recession. So, a recession’s not necessarily a bearish thing for your business, right? You need to kind of look at the opportunities and the risks and know which lever you pull when based on your company’s position.

Jim Fitzpatrick:
Sure. So for the people that are listening that say, well, what’s the point of planning for a recession if you have no idea how or when it will happen?

LJ Suzuki:
Yeah. That’s a really good question because usually no matter what plans you put in place you’re going to end up throwing them all out and doing something totally different during the recession itself. But that doesn’t mean that the planning process was not fruitful. The process of planning is to understand what your options are and what are the situations when it’s good to deploy certain options and bad to deploy other options. That way you can recognize those moments and act quickly and decisively.

LJ Suzuki:
The people that usually die during a recession, the businesses that die during a recession, do so because they can’t decide quickly enough how to adapt to the environment and they take too long to change. By going through a planning process, even if your plans end up being useless, by going through the planning process you are empowering yourself to make faster decisions based on a rapidly changing environment.

Jim Fitzpatrick:
That’s right. No one likes to think of cutting back or winding down or saying, well, last year we did $5 million and now you’re asking me to plan for maybe only 3.5 million. That’s something that I just want to stay away from. It’s like that and going to the gym. I don’t want to do those two things. So therefore I don’t, but nevertheless, you have to. If you’re going to be healthy and you want to maintain your health, you got to go to the gym. Same thing here, this is one of those things you just have to do. I mean, you can’t put off planning for something like this. By the way, you kind of owe it to the other shareholders in your business, and also the employees so they don’t say, well, how did you get into this situation? Why am I being fired right now? Oh, well, we didn’t plan for this. What do you mean you didn’t plan for it?

LJ Suzuki:
Yeah, absolutely. I mean, every business owner knows that like the early bird gets the worm. If you’re the one that’s proactive about this and you’re starting the conversations and your team is thinking about the situation before somebody moves your cheese. You’re going to be the one that can capitalize on the opportunity instead of the one who’s desperately trying to keep up in a rapidly changing environment.

Jim Fitzpatrick:
That’s right. Any other suggestions what a business owner can do to prepare for a recession?

LJ Suzuki:
Well, everybody’s situation is going to be different right now. Some people are coming out of COVID-19 with a lot of strength and a massive growth cycle, other people are struggling with supply chain or capital issues right now. So you really need to take your specific business situation into account. I highly recommend that you collaborate with your management team on this, don’t make these decisions in a vacuum. Talk to your advisors, talk to your board, talk to your managers and figure out what your plan is.

LJ Suzuki:
There’s other opportunities that might exist depending on how strong your business is right now. If you are in a position that you can take out a loan now is still a great time to borrow money. Interest rates are going up, yes, but they’re not high yet. And if we do enter a recession, the person with the most cash is going to have the most opportunities available. The other thing you really need to do right now is keep close tabs on your competition, both because of inflation and supply shortages, but also a potential recession, the environment will be changing quickly. And if you see signs of weakness from your competition or if you see eroding market share, that’s an opportunity for you to take your business and become more competitive.

LJ Suzuki:
Last piece of advice. If you are thinking about raising equity capital, either from venture capitalists or from friends and family or whatever, you either want to do that as soon as possible or you want to change your business plans and push that out as long as possible, because it’s going to be very difficult to raise equity capital over the next 6 to 12 months.

Jim Fitzpatrick:
Right. Right, right. That’s a very good point. And then I completely agree with you that the winners on this that will come out shining on the other side of a recession are the ones that will have the cash reserves. And to your point, now is the time. They say the best time to fix the roof is when the sun is shining, not when it’s raining. Right?

LJ Suzuki:
Exactly.

Jim Fitzpatrick:
That applies now. There’s also, the credit is available right now, where in a recession, usually the banks tighten up that credit and small business owners go in and it’s like, nope, sorry, we would’ve done that six months ago, but we’re not given that loan today. We just don’t know. We’re unsure ourselves. And so great advice get as much cash as you can in your reserves, come up with a plan. If you don’t have somebody by the way, like an LJ Suzuki on your side or on your team give him a call, but if you don’t give him a call get somebody that has got the skillset that you need to manage the finances, manage the assets of your company the right way.

Jim Fitzpatrick:
Many of us as entrepreneurs put that aside and say, well, I don’t really need that right now. I don’t need a CFO or I don’t need a full blown financial advisor. The best part about working with a company and a, and a person like LJ Suzuki here is the fact that you only use them when you need them, rather than putting somebody on a huge payroll or a huge salary, I should say, on your payroll as a CFO. That’s what’s cool about companies like LJ’s is that you just need them for certain projects, you can bring them in for that project. This is probably one of those areas that you want to start thinking, who do I really have that’s got a lot of expertise in this area of finance and business to help me make it through a possible recession.

Jim Fitzpatrick:
By the way, if you do that, let’s hope it’s money that’s well spent and maybe you say, well, I wasted that money. No, you didn’t waste that money, you’re going to learn a tremendous amount about your own business in the process. And let’s hope that you never really need to put all this money aside, or I should say that a recession comes.

Jim Fitzpatrick:
LJ Suzuki, CEO of CFOshare. We’re going to show all the information right here, these are the kind of solutions by the way that we want to be bringing small business owners in the Atlanta region, these kinds of solutions so that you can help run your business better. CFOshare is the name of the company, as I said, I’m going to show all the information and get a hold of LJ Suzuki, he’s the guy that you want on your side. And if you don’t have LJ, get somebody. So thank you so much, LJ. I really appreciate your time today, I think the advice that you gave to entrepreneurs and small business owners is exactly what they need. So thank you.

LJ Suzuki:
Always a pleasure, Jim. Thank you.