Thriving Through Uncertainty

I recently co-hosted a seminar for Freedom Bank’s clients with the title “Thriving Through Uncertainty.” The participants were local entrepreneurs who have first-hand experience managing the risks of their business and its growth. All the participants agreed that we are in uncertain times and, as a result, business owners must step back and reassess the assumptions we make as we move into an entirely different landscape. This is not just an academic exercise, there is real tangible value of getting ahead of this uncertainty. Great companies make major changes to strengthen their organizations before an economic recession arrives, and through this preparation, can thrive during the adversity while others stall out.

Freedom Bank is no different as we are being proactive to address the challenges and opportunities in banking. Our strategy as originally retooled in early 2019 is working and the bank has doubled in total assets to $1.0 billion and grown our book value (ex AOCI) by 60% over the past four years. However, at its June 2023 meeting, the Board approved a set of performance initiatives due to significant changes in banking industry conditions and the bank’s cost of funds.

We have also used this as an opportunity to critically rethink what will be required to facilitate the bank’s further growth in this uncertainty to propel us well beyond the $1.0 billion that we achieved in the first quarter of 2023. This has placed a keen eye on current skill sets and necessary training to prepare for an organization of greater size and complexity and on the tactics necessary to shore up net interest margin, bolster fee-based revenues, and reduce expenses. We continue to be focused on preserving strong liquidity and capital levels that enable us to convert on opportunities that could come to us in a downturn.

Uncertainty

Max De Pree famously said, “The first responsibility of a leader is to define reality.” Recent headlines from the business pages of the?WSJ,?Barron’s, the?New York Times, and?Bloomberg News?paint a picture with mixed signals. We have been on an economic roller coaster since the COVID-19 Pandemic that triggered economic collapse and then stimulated inflation that has not been seen in decades. What lies ahead in the economy or our industry is harder to predict today than it has been in some of our professional careers.

As we embrace uncertainty, a framework may be helpful in order to (1) assess where you are strong and where you may need to turn your attention, (2) consider a plan of action to work on the right things at the right time with the right people and (3) know what actions you and your leadership team should take to make sure you grow in any environment, good or bad.

Readiness Assessment?

There has been lots of research on managing in a downturn, how to prepare yourself, and effective strategies to succeed.?Harvard Business Review?has a book of articles on it, and Bain & Company has published on it as recently as this past July with?The New Recession Playbook. The common theme of this research is to (1) start to plan now for various scenarios, (2) act and surgically restructure before the downturn comes, and (3) selectively reinvest for competitive outperformance.

The research also suggests that planners generate higher earnings right away. As their companies entered the recession, their results diverged sharply. And in the non-recessionary years, this work helps with scaling and building greater enterprise value. A strong readiness assessment is organized around seven categories: Leadership, Balance Sheet, Revenues, Expenses, People, Customers/Vendors, and Technology. Consider these questions as you reflect on your company’s ability to thrive during a period of uncertainty, which come from the Readiness Assessment tool developed by Craig Huston and Convene Corporation:

Is Your Leadership Team Strong and Aligned?

? Every leader knows what function they own, their 3-5 priority outcomes, and KPIs.

? We understand our core business and intentionally avoid unnecessary distractions that increase cost with little or no return.

? Leaders have defined the personal financial and time sacrifices they must make in a downturn to lead by example.

Stress and disruptions often will bring a company’s leadership team closer together and galvanize the culture of the company. This will be aided by clarity on the most critical goals and advanced planning on the contingency plans. Make sure you meet as a team to develop an ownership strategy around executing and reducing costs without “cutting the muscle” in your organization.

Balance Sheet: Is Your Financial House in Good Order?

? We have an established Line of Credit, have worked to increase the size of the line, and have significant available capacity on which we can draw.

? We understand and regularly monitor and manage the cash drivers for our business and have a cash reserve that will cover several months of operating expenses.

? We constantly review requirements to ensure our inventory is optimized to prevent a disruption in service levels without tying up unnecessary cash.

Companies can be a “cash flow monster” with complexity in payment cycles while you are managing big projects. Be focused on the potential working capital drags in your business and have operational or liquidity tactics to manage them.

Cash Creation: How Vulnerable Is Your Revenue?

? We have sufficient diversity in our revenue sources, so one or a few clients or market segments do not dominate our total revenue.

? We have identified our most profitable relationships and implemented a key account retention strategy for each.

? We know our break-even point and are willing to accept revenue that will cover expenses – without taking on bad business – in a downturn.

Businesses know that customer diversification is critical. Know where your client vulnerabilities lie and address them head on and begin building contingency plans to diversity your customer base.

How Closely Are You Managing Expenses?

? We have identified and prioritized our operating expenses ... and are prepared to proactively eliminate expenses as needed.

? We have minimized our real estate expenses by maximizing our use of existing space, selling or subleasing unused/underutilized space, and monitoring the real estate market for more favorable terms.

? We actively solicit and implement cost-saving measures and process improvement ideas from our employees.

Examine your expenses during previous downturns and where and how variable expenses behaved. Understand the variables and levers that you can pull to improve efficiency.

What Is the Status of Your Most Critical Assets?

? We have developed a retention strategy for key employees.

? Our people are cross-trained and there are at least two people with knowledge to perform critical tasks.

? We have evaluated and pre-selected a labor cost reduction strategy (i.e., 10% workforce reduction vs. 10% reduced hours vs. 10% reduced compensation) that can be implemented if needed.

We know that people are the biggest asset in our company and often represent the largest untapped potential. Don’t underestimate what your team can do when called upon and look for those next-level leaders to step up and move outside their comfort zones to tackle challenges during a downturn.

Are You Vulnerable to Customer and/or Vendor Shocks?

? We have identified our customers who are most susceptible to a business or economic downturn and have analyzed the impact on our business if they fail.

? We closely monitor our accounts receivables and communicate with our customers, and our A/R is current.

? We are not overly reliant on just a few suppliers or vendors. Instead, we have multiple sources of supply, so if one fails, we can still operate successfully.

Understand your supply chain, the potential bottlenecks, and possible alternatives. While you might find the simplicity and cost savings of a single vendor most efficient, this dependence can strangle the business if the vendor experiences problems.

What Is the Status of Your Technology?

? We understand how leading competitors are leveraging technology in our industry and are intentional about matching or exceeding their efforts.

? We use technology to capture and create the necessary data analytics to make quick, informed decisions.

? We have a strong technology team (in-house or outsourced) that is directing our technology strategy and ensuring we remain competitive. Monitor your competitors to best understand the current situation in your industry in order to remain at the forefront in terms of digital capability and client capacity. However, understand the use case and adoption required in order to drive strong return on investment for the technology spending.

Conclusion

The difference between theory and results is execution. The entrepreneurs in the room talked about how ready their team and company were to take action, where their company was most vulnerable, which areas can provide the most impact to their business, and who on their leadership team would champion this process. We agreed that the need to pre-plan for various challenging scenarios was important in order to chart a course for hard decisions before the storm hits, the pressure builds, and emotions rise.

I’m confident we are utilizing a similar approach at Freedom Bank. By taking proactive steps to sustain our earnings growth and preserve the strength of our balance sheet, we will be able to take advantage of opportunities other banks may not be prepared for. This could create opportunities for us in terms of banker recruitment, client acquisition, and bank acquisitions. Our core values of IDEAS – Innovation, Discipline, Experience, Attitude, and Service, will continue to guide our actions and differentiate our performance in the quarters and years ahead.

End Note: Thank you, Tommy Battle, MBA, CEPA, CFP? President of Financial Designs, for co-hosting the seminar and contributing to this article with all the research and tools for Readiness Assessment, which is a tool developed by Craig Huston and Convene Corporation and used with permission.