The "Soft Landing" Requires Planning

Uncertainty may be a cause for concern, but when was the last time you were truly in a certain world? Your outlook for 2024 depends on your industry, geography, and the extent to which you trust in the accuracy of mainstream media. We subscribe to multiple economic data sources to help our clients draw their own conclusions. The prevailing sentiment among economists suggest anticipating a “soft landing” in the economy in 2024. For most of us, this means no significant increase in unemployment, the absence of large layoffs, and no general business malaise. However, prudent planning to minimize negative impact necessitates consideration of multiple scenarios and possible outcomes.

Here are some important data points to think about as we head into 2024:

• The current inflation rate for US consumers in 2023 was 3.1% and declining slowly. Estimates for inflation in 2024 vary between 2.5%-4%, as the Fed targets 2% but they will have to throttle interest rate cuts slowly to avoid an inflation flare up just before the 2024 election year.
• The current prime rate is 8.5% and will likely begin descent in Q2, 2024. Estimates of the decline average between 75-125 basis points. Banks are expected to continue restrictive lending practices.
• Consensus GDP growth in 2024 is -0.5% to +2.5% with growth accelerating into 2025. Most major economic forecasters are betting on only one negative GDP quarter in 2024.
• The tight supply chain was supposed to have eased in 2023 but it is industry dependent. Companies need to maintain “just in case” inventory management.
• The employment market will remain tight for the near future. Demographic changes result from retirements increasing and shortage of workers accepting lower paying jobs. As 2023 closed, wage increases are averaging around 4% and health care plans are increasing premiums at 9-12%.

We recommend that you plan multiple scenarios and different “what if” assumptions. Define different scenarios based on supply chain changes, possible automation investment in lieu of people, and diverse ways to grow – either organically or through acquisition. Some areas of planning include:

1. Pricing changes and how much cost can be passed on to your customers.
2. Risk factors in your markets such as: competition, government regulation, fuel cost variance, talent retention, natural disasters, and foreign wars disrupting supply chain.
3. Availability of capital if your bank line gets called; the cost of the capital that might be available.
4. Loss of major customers or groups of new customers if a major competitor fails. Either way poses risks.

We strongly advise constructing a financial forecast model to evaluate these “what if” scenarios and to quantify various potential outcomes. Utilizing this process not only enhances your preparedness but also boosts your confidence in managing uncertainty. By proactively testing your resilience, you gain a deeper understanding of the potential impacts of different assumptions, enabling you to assess and categorize risks associated with alternative courses of action. Establishing clear paths and anticipating tipping points for transitioning between plans allows business owners to navigate uncertainty more effectively. Moreover, if this multi-scenario strategy is comprehended by your team, it contributes to an improved ability to attract and retain top talent.

C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on these issues frequently through sophisticated modeling and experienced management. Give us a call?for more information and details. We have been there and done that!