September 16, 2022 Can Manufacturers Take Advantage of a Recessive Economy

Taking the right proactive steps could present an opportunity to consider growth, expansion of operations.

By Steve Albart, Enterprise Bank & Trust

Forty-year record-high inflation, slowing growth and the Federal Reserve’s interest rate hikes are driving up the likelihood of recession. Especially under the influence of excessive news coverage, many manufacturers — understandably — feel fear.

Remember that recession and inflation are a natural part of the business cycle.

Since the onset of the pandemic in early 2020, the global economy has shifted from too little inflation to today’s elevated levels. A drastic reallocation of demand, supply chain issues and labor challenges all contributed to an inflationary impulse.

Ripple effects of that impulse included wage growth due to employees’ newfound negotiating power, and general elevated inflation resulting from companies’ pricing power.

Today, naturally slowed growth weighs on inflation, while both governments and central banks are wrestling to counteract building pressure and avoid unnecessary tightening.

Consequently, many manufacturers are experiencing an increased borrowing need in order to combat inflation and abate supply chain challenges. Some businesses are seeking to increase lines of credit to meet their working capital needs and striving to continue business as usual to the extent possible. This cycle has run its course time and time again.

Rather than raise alarm, manufacturers can brace their business with help from a strong management team, and even identify opportunities to strengthen and grow out of a unique — and temporary — situation.

Can there be any positive outcome from a recession?

A recession could help balance out inflation. The economic cycle naturally comprises periods of expansion and periods of slowed growth which sometimes mean recession. Economic imbalances can be remedied by recession, in turn clearing the way for growth once again.

For small and midsize manufacturers, leveling out inflation will ease many of the issues that have made recent years challenging. In addition to lowering the cost of products and raw materials, supply delays and cancellations will also be less widespread. On the labor side, the cost of finding, hiring and retaining talent should drop a bit closer to previous levels, although arguably forever changed by workers’ new preferences.

A recession offers growth opportunities. In a recession, companies in vulnerable management or financial situations risk bankruptcy. When a company is headed for bankruptcy, its finished goods and inventory won’t disappear. Its goods, products and services will shift to higher performing companies, along with its employees, because recessions help the market become more efficient.

How should manufacturers approach a possible recession?

An impending recession is an opportunity to reevaluate short-term business goals and seek out new opportunities. Focus on factors that are within your control:

1. Support your employees.
   Employees read and hear the same news you do, and the possibility of recession can be worrisome. Listen to employees’ concerns and put their mental health first. If possible, offer greater flexibility, development and training opportunities, and other benefits that allow a team to perform at its best.
2. Evaluate your cash management strategies.
   Cash management is the process of collecting and managing cash, and it’s critical to your company’s overall financial health. Make it a habit to regularly manage your balance sheet to ensure you have sufficient working capital and liquidity, along with review of margins and expenses. When you have a firm understanding of your cash conversion cycle, profit margin and key performance ratios, you can eliminate profit busters and maximize cash flow.
3. Explore financing options before you need them.
   In addition to traditional loans, there are several more financing options available for small and midsize businesses. Many offer favorable interest rates and convenient, customizable terms, such as asset-based loans or U.S. Small Business Administration (SBA) loans. Work with a banker to explore options and ensure financial documents are in order so you will be ready to apply for the right loan if the need arises.
4. Conduct an audit of the health of your business.
   Partner with a banker and accountant to analyze and understand the financial position of your business. Also incorporate contingency planning for unexpected events. A helpful way to keep your finger on the pulse of your business is to build or adopt a financial performance dashboard. A dashboard with real-time metrics and key ratios can help you visualize and understand financial data, and guide you when making performance and business decisions. Staying on top of these aspects of financial wellbeing will allow you to make swift, informed decisions no matter where a possible recession steers you.

Strong manufacturing businesses have strong management and an advisory team that understands your goals. A trusted financial advisor, banker, lawyer and accountant can help you uncover opportunities that may otherwise be drowned out by noise or panic. Together, determine what is possible and take advantage of a unique economic moment in time.

Steve Albart serves as Regional President at Enterprise Bank & Trust. He provides expertise in finance, margin analysis, capital structure and business planning for privately-held and family owned businesses. Consulting includes succession planning and acquisition planning.

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