Economic Headwinds and Company Playbook in 2023

David H. Crean, Managing Partner for Cardiff Advisory LLC, offers his guidance to business owners, entrepreneurs, and Boards of Directors of life science and healthcare companies on how to prepare for economic challenges anticipated in 2023.

The likelihood of a recession in 2023 is greater than 50% according to economist predictions regardless of whether you are prepared for this to occur or not. As recently as last month, JP Morgan economists predict a "mild recession" in the United States in the back half of next year given expectations for the Federal Reserve to continue tightening monetary policy and head towards 5% in its battle against inflation. Economists expect the economy to contract by 0.5% by Q4 2023, and possibly drag into 2024. Other large U.S. banks are also in step with JP Morgan's predictions and are guiding their clients for a worsening economy in 2023 as inflation threatens consumer demand and slows economic growth.

Business leaders must prepare their companies to weather the storm and come back stronger once it subsides. Revenues could and may likely slump, supply chains could become impacted, P&L's will be heavily scrutinized as expenses will be tightened, and securing necessary capital will become a lot harder to acquire.

It is said that great companies are born in difficult times but what does economic turbulence mean for companies? We have entered an era of “higher for longer” interest rates and cost of capital. Companies need to draw on the proven playbook for success in a world of slower growth, higher inflation, and more expensive capital.?The real question is how high and for how long. According to experts at McKinsey , it’s the terminal rate that counts, and how long rates remain there.

An economic downturn does not have to be the end of your company. As an entrepreneur or business owner, you’re required to operate lean, make tough decisions and act swiftly, especially during periods of economic uncertainty like the one we are likely to face. Companies should rely on scenario planning and prepare a set of long-term moves that will help them thrive in a higher-for-longer environment. That said, there are various steps you can take now or in 2023 to get through the turbulence including practicing discipline on costs, building resiliency, demonstrating courage, and pursuing opportunities.

Practice discipline on costs

Inflation and interest rates often indicate how willing people are to spend. People will cut back on their spending and savings will be impacted. Expect consumers to be shifting their focus to goods and services they deem essential and highly valuable. In times of recession, people don't want to spend as much money and they need to experience a larger value for the money they do spend.

If you lead and manage a business, you’ll likely need to reduce your burn rate and exercise increased discipline on costs, both fixed and variable. We are already witnessing impacts throughout the second half of 2022 on human resources as there have been numerous layoffs in various sectors, including in the high-growth areas of life sciences and technology companies. Leaders need to also scrutinize their hiring plans and find ways to be more efficient while needing to re-engage employees post-pandemic and balancing hybrid work models and workforce reductions that may be bad for morale and employees leaving leaders less prepared to surge back when the recession ends.

"Find multiple ways to extend your financial runway."

Communicating with your team, partners, and key service providers early in the process is also a recommended action. Engage with company leaders about how they would cut costs. Even small savings add up over time, and the process can help signal to the company overall that a disciplined mindset is needed. This is about protecting your revenues and earnings and demonstrating shared responsibility across the organization. Ask your service providers and suppliers for flexibility on terms to free up cash flow. Lastly, it is a great time to audit your books and ensure you have the cash reserves to weather the bad times. While you're at it, audit your processes too.

Build resiliency and demonstrate courage

Companies should also be thinking about more structural solutions that not only manage or drive costs but also build resilience and can drive long-term value creation. Various dimensions of resilience include finance, operations, technology, and business model.

Resilience is a vital “muscle” for companies operating in a world of endless volatility and disruption.

Growth remains a top priority for business leaders during economic turbulence but can remain elusive for many. Top-performing leaders prioritize growth , a choice that shapes behavior, mindset, risk appetite, and investment decisions across the organization. According to McKinsey , growth-oriented leaders react decisively to shorter-term disruptions that can be turned into opportunities and build organizational resilience and agility to respond to change and leverage disruption. A higher-for-longer environment is exactly the kind of jolt to growth that leading companies recognize and take advantage of.

With the economic radar flashing red, it’s tempting for business leaders to pull back a bit, postpone some initiatives, and scale back on growth plans. The best leaders and companies are ambidextrous: prudent about managing the downside while?demonstrating courage to pursue the upside . These leaders are thinking about the next decade, not the next month. Many are encouraging their organizations to rethink opportunities and reset the strategic gameboard in light of the current volatility.

Identify and pursue opportunities

Company leaders should map out their opportunities for growth at the beginning of their economic planning process. Then as they work through likely cuts to expenses, they can keep in mind the upside potential they want to grasp in the final stages of a recession. Just because there’s a recession doesn’t mean business is going to be down for everyone equally. Industries and sectors all respond differently under adverse conditions.

Final thoughts

These steps can help guide leaders during an economic downturn and increase the probability of being more successful and stronger at the end of the cycle. Leaders need to make sure that when the recession ends, their organizations are in a position of strength to take advantage of a rebound. With careful planning, nimble decision-making, and clear communication, downturns can quickly turn into opportunity.

Buckle up and fasten up your seat belts. Be safe out there. Go get em'.

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Disclosure

David H. Crean, Ph.D., is Managing Partner for Cardiff Advisory LLC, an M&A investment banking strategic advisory firm focused on the Life Sciences and Healthcare sectors. This article is provided for informational purposes only and does not constitute an offer, invitation, or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Cardiff Advisory LLC and BA Securities are separate and unaffiliated entities.?

While the information provided herein is believed to be accurate and reliable, Cardiff Advisory LLC and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited, and subject to completion, correction, or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.