What’s all this I hear about the economy?
If you’ve been listening to the news the last few weeks, you’ve likely heard about inflation and the fears that it will cause a recession in the US economy.
What does that mean for how you should be managing and leading your agency?
First, what is a recession?
A recession occurs when economic growth slows down. We’ve had 9 – 10 years of solid growth (with a brief hiccup in the spring of 2020) and that’s got to come down to earth at some point.
When economic growth is strong, and the economy is creating jobs, the rising demand makes it possible for companies to raise prices. It can also create more demand for jobs than there are people to fill them, which creates the kind of wage increases we’ve seen in the last year or so.
The danger of inflation is that rising prices create an expectation of even higher prices. This is how you get people bringing wheelbarrows full of cash to buy a loaf of bread.
To combat this, the Federal Reserve raises interest rates. Higher interest makes it more profitable to save money and more expensive to borrow and spend. This tends to slow down capital purchases and cool the economy.
Having said all this, most economists estimate that the chances of a recession are less than 50%, and if it does, it’s not likely to occur until 2023-2024.
What does this mean to you?
When the economy gets shaky, your clients will start missing or delaying payments; they are going to start negotiating harder, then eventually, they are going to cancel contracts.
Those things are easier to weather if you have a good cash cushion. If you’ve been riding on 2 – 3 months of operating expenses in the bank — maybe it’s time to stretch that to 4 – 6 months’ worth of cash.
Most importantly, focus extra efforts on business development.
Even in a bad economy, some businesses are thriving. It’s your job to find them! That means more outreach and more business development efforts to maintain your growth.
We’ll talk more about how business development is changing on Thursday. But in the meantime, hit reply and send me any recession-related questions you have!