Preparing for Economic Uncertainty
Scott D. Clary | Mental Models, Performance, Business & Entrepreneurship
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Preparing for Economic Uncertainty
As business owners, uncertainty is one of our worst enemies. Of course, it is – after all, our business is our livelihood, and no one wants to see their livelihood jeopardized. Unfortunately, there are many factors outside of our control that can impact our business negatively, and one of the most significant is economic uncertainty.
I'm not an economist, and the last thing I want to do is strike fear or panic into the hearts of business owners. This is not a warning of the hard times ahead. But because the economy has such a significant impact on our businesses, it's important for us to be aware of the potential risks and take steps to protect our businesses and ourselves.
In a recent interview, I spoke to Ron Gruner. He's an expert in all things U.S. politics and economy, and it was fascinating to hear his insights on the current state of affairs, as well as some of his reflections on history.
While only a small segment of our conversation was devoted to economics, it was enough to get me thinking: is it so unlikely that another major recession or depression could happen in our lifetimes, or even in the near future? And if it does happen, how can we be prepared?
As business owners, we can't afford to bury our heads in the sand. Ignorance is not bliss – it's dangerous. So let's take a closer look at the economy and some of the things we can do to help cushion our businesses from potential negative impacts.
Ron Gruner, Author of We The Presidents
Before diving in, I want to give a brief recap of who Ron Gruner is and his career so far. Ron is one of the most knowledgeable people I've spoken to in terms of U.S. politics and the economy. He has a unique perspective, as he's not only an expert on these topics but also an established entrepreneur and computer engineer.
Here's an overview of his achievements:
Ron has been a pioneer in the commercialization of corporate transparency for over twenty years.
He founded Shareholder.com in 1991, effectively inventing the industry of online investor relations.
Prior to Shareholder.com, Ron served as Chief Executive Officer of Alliant Computer Systems, a supercomputer company that had a market cap of nearly $500 million.
Ron also designed many successful computers including the Nova 1200 and Eclipse Series.
Currently, Ron is a founder and Chief Executive Officer of the legal services firm Sky Analytics. He recently released a fascinating book, We The Presidents, which focuses on major issues affecting the population today.
Seeing his many areas of expertise, I was excited to grill Ron on all things economic uncertainty and hear his projections for the U.S. economy moving forward. Let's start with a few insights pulled straight from the interview.
Modern Monetary Theory
A big topic we touched on in the interview was the concept of Modern Monetary Theory. Without going too deep into the weeds, the theory essentially believes that our country could run a deficit for an extended period of time without any real consequences. The government could simply create more money to spend (or give away) if it wanted to.
While this theory is gaining traction in some circles, it's important to note that it's still just a theory. Ron is not convinced that it will actually play out in practice and believes that our government would quickly hit a debt ceiling if it tried to implement these policies.
"I think that's going to be wishful thinking. The theory basically says, the United States can issue as much debt as it wishes as long as it can find buyers for that debt. That just seems to be begging for a fall. If buyers begin to back away, interest rates go up, and that whole thing could collapse like a house of cards."
While MMT certainly has its merits – more money for public spending, universal healthcare, and the creation of jobs – it does seem to require an element of wishful thinking that could hold dire consequences for our economy.
"It's all based on optimistic thinking: what's happening now is going to continue happening in the future. But ideally, politicians should have the courage to tell people that we may have to tighten our belt, whether that means cutting spending, raising taxes, or both to get our fiscal house in better order."
U.S. Economy Throughout History
If the U.S. were to face recession or depression, it wouldn't be unprecedented. We've seen these cycles throughout our history:
The Panic of 1837 ignited a major depression that lasted six years.
The Panic of 1873 led to a depression that lasted four years.
The Great Depression of the 1930s was the worst economic downturn in world history, lasting for a decade.
The most recent recession (2007-2009) was one of the worst in U.S. history, with the unemployment rate reaching 10%.
The U.S. has also experienced no less than twelve economic recessions since World War II, each causing strife for businesses and individuals alike.
Not only is Ron Gruner well versed in these events, but he also sees the potential for a 2008 recession rerun if policymakers follow the Modern Monetary Theory mindset.
"I'm worried that, with national debt climbing like it is – based on the theory that we'll just keep pushing debt out, or we can always refinance – it's going to be a repeat of 2008 on steroids."
What This Means for Us
Again, I'm not writing on this topic in order to fearmonger or to try and convince you that the sky is falling. I'm simply pondering what could happen if – or when – the U.S. economy takes a turn for the worse.
In reality, we've already had experience with an economic downturn in very recent history. The COVID-19 pandemic saw businesses and individuals all over the world scrambling to protect their income and savings.
Recent events only make this conversation more relevant. So, how can we as individuals and business owners protect ourselves from future economic uncertainty?
Withstanding Economic Crisis
This isn't the first time I've touched on the topic of crisis-proofing your business. In a past interview with Vincenzo Guzzo, we talked about the power of flexibility and adaptability in the face of challenging times.
Today, though, I want to focus on financial preparedness rather than adaptability. It's crucial that we have a plan in place for dealing with difficult times, whether that's a pandemic or an economic recession.
Step 1: Maintain your Financial Hygiene
With geopolitical tensions rising, and still coming off the back burner of the COVID-19 recession, all businesses should be maintaining their financial hygiene in preparation for a potential downturn.
Why? Because history tells us to hope for the best and prepare for the worst. Run your business as though you are actively preparing for a recession, and you'll be in a much better position when – not if – one hits.
Operate Within Your Budget
This should be a given for any business, but it's especially important during uncertain times. Don't crack the piggy bank. Operate within your means, and be mindful of your expenses.
This doesn't just mean reigning in unnecessary spending; it also means ensuring that you're getting the most value for your money. Evaluate your suppliers, renegotiate contracts where necessary, and explore other ways to save money without compromising the quality of your product or service.
Build a Cash Reserve
In difficult times, it's important to have cash reserves to fall back on. This will help you weather the storm while you work on long-term solutions. When setting your budget, make sure to allocate a portion specifically for rainy day savings.
If you can, try to increase this cash reserve as much as possible. The more money you have saved up, the better off you'll be if things take a turn for the worse.
Invest in Your Business
While it might seem counterintuitive to invest in your business when the economy is uncertain, this is actually a very smart move.
Think about it: if the economy does take a turn for the worse, the value of your business will likely decrease. But, if you've already invested in your business during tough times, you'll be in a much better position when the market rebounds.
Plus, investing in your business can help you grow and expand, which can lead to even more success down the road.
Stay Ahead of the Competition
During a recession, not all businesses face the same odds. In fact, the past few recessions saw 14 percent of businesses accelerate their revenue and profits rather than decline.
If you want to be one of the businesses that thrive during uncertain times, you need to stay ahead of the competition. Keep a close eye on your industry, monitor your competitors' moves, and always be looking for ways to differentiate yourself from the pack.
Step 2: Plan for the Worst
It's much more comfortable for us to avoid thinking about potential downturns altogether. But history tells us that this doesn't do anyone any good. In fact, it's much better to be proactive and plan for the worst-case scenario.
What would happen to your business if the economy took a turn for the worse? How would you survive? What are your backup plans?
Start An Emergency Fund
Many individuals devote a portion of their pay each week to an emergency fund, and businesses should do the same. It doesn't have to be for anything in particular – it can just be a pool of money that you can access in case of an emergency.
This is especially crucial for businesses that are heavily reliant on credit. When the economy goes south, credit lines often get tightened, making it difficult to get the money you need to keep your business afloat.
As a guideline, work towards an emergency fund that can cover your business over six to nine months. This will give you some breathing room while you figure out long-term solutions.
Get Familiar With Your Liquidity
Liquidity is the ability of a business to turn its assets into cash quickly. Before uncertain times hit, getting familiar with your liquidity options will give you a leg-up.
There are a few different sources of liquidity that you should be aware of:
Business assets: Can you sell any of your assets quickly if you need to?
Accounts receivable: Do you have any customers who are likely to pay their invoices quickly?
Credit lines: Do you have any credit lines available to you? How easy would it be to access them if needed?
Inventory: Can you sell any of your inventory quickly if needed?
Knowing your liquidity options will help you make informed decisions if the economy does take a turn for the worse. Keep an eye out for government grants and loans that could help you as well.
Reduce Your Expenses
Just as you'd discontinue a gym membership if you've only visited once in the past year, it's helpful to eliminate unnecessary business costs where you can. Whether that's overhead expenses, marketing budgets, or employee salaries, look for ways to reduce your spending.
This doesn't mean that you have to cut back on important areas of your business – just identify the areas where you can save money without compromising quality or service.
Some of these areas might include:
Renegotiating contracts with suppliers and vendors
Switching to a less expensive supplier
Streamlining processes to reduce waste
Reviewing employee benefits and salaries
Outsourcing non-essential tasks
Going back to emergency funding, you could even redirect the savings from these cuts directly into your fund.
Step 3: Set Your Business Up for Success
A great mindset when it comes to your business is to act as though you are raising a child. You want them to be independent, and to survive on their own; you want to equip them with all the tools they need to be self-sufficient.
This is the same mindset you should have towards your business. You want it to be resilient, and able to thrive in any environment. And the best way to do that is to continuously improve it.
There are a few ways you can go about this:
Invest in your business. Are you watching current industry trends and staying ahead of the curve? Are you upgrading your technology and equipment? Are you expanding your services or product offerings?
Train your employees. This could mean on-the-job training, or it might be professional development. You should always be pushing your staff to excel and grow.
Evaluate your processes. Are there any redundancies or inefficiencies in your business? Can you streamline things to make them run smoother?
Automate where possible. This could be anything from automating accounting tasks to using a CRM system. Automation is a straight path to time and money savings, so make sure to explore this avenue.
Invest in your client relationships. When disaster strikes, you want a solid and loyal client base to fall back on. Make sure you're doing everything you can to foster these relationships and keep them strong.
Of course, we don't always have the means to invest in our businesses. But that doesn't mean we can't take other steps to improve resilience. We can always be proactive in our problem-solving and stay ahead of potential issues.
For instance: being friendly and reliable toward your clients builds trust; having a solid backup plan in case of emergencies shows preparedness; tracking your expenses and profits helps you stay mindful of your financial situation.
The most important thing is to remember that resilience is something that can always be improved. There's no one-size-fits-all solution, so take the time to tailor your approach specifically to your business.
With a bit of effort, you can set your business up for success – no matter what the future holds.
My Success Story Podcast interview with Ron Gruner only touched on this issue briefly – we spent most of the conversation talking about past U.S. presidents, which was fascinating. I highly recommend listening to the full interview if you haven't already.
How prepared do you feel financially? If a disaster were to strike, have you put measures in place to help your business rebound?
Again, I am not predicting a 2022 Wall Street crash or an upcoming recession; my aim for this newsletter is simply to get us all thinking about these questions, and to provide some starting ideas on how to prepare your business for anything.
Remember: hope for the best, prepare for the worst, and stay ahead of the curve. Until next time!
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