We will soon be issuing the results from our most recent semi-annual Private Company Pulse Survey, which we conducted last month. The respondents saw 2019 shaping up to be another good year; most are forecasting growth rates in the 5 – 10 percent range. Those numbers are pretty consistent with public markets, where the average growth rate is expected to be in the 7 – 8 percent range. We are also seeing evidence of strong business conditions in the year-end reports we are producing for our clients, and in talking with them about their backlogs, which seem full.
All of this comes on the heels of the (mostly) positive economic conditions we’ve experienced over the past several years. A sure sign of the latter stages of a strong economic cycle is when companies are less worried about their sales and more worried about finding enough skilled workers to produce and ship those sales. Truly, that tide has been high for several years.
This environment reminds me of a 2008 quote from Warren Buffett: “You never know who is swimming naked until the tide goes out.” While I am not a pessimist, and I definitely don’t believe we are headed toward another financial crisis, I do think it is wise to keep Buffett’s quote in mind as you consider your business strategy.
The reason is human nature. When top line revenues or sales are plentiful and the focus is on growth, such conditions can mask issues and problems within our businesses. After all, is it more fun to chase growth or deal with thorny issues that are difficult to solve? From my experience, very strong economic conditions can improve results at even poorly-run companies. However, it is painful to fix the underlying problems in those companies after the tide goes out.
I recently met with a business owner of a well-run construction firm who just finished a record year and has almost all of his 2019 backlog already covered. He certainly plans to continue taking advantage of the strong economic climate. But he is also beginning to shift his focus more internally on things like the company’s strategy, cost structure, and execution.
My advice to companies when conditions change is to use it as an opportunity to improve the business. But why wait until the tide goes out? Here are a few areas to consider now, while the tide is still high:
- Change your planning assumptions. Migrate from top-down to bottom-up by focusing on fixing processes and improving efficiency.
- Reconsider your customer and market focus. Are your resources spread too thin and is your focus too dispersed from your core? Do you have real clarity around the perfect customers, products, and markets for your business?
- Complete a threats analysis. When conditions are good, we all tend to focus on the “O” in a SWOT analysis – the opportunities – because they can be vast. Perhaps it is time to think more proactively about the potential threats that could hurt you.
- Focus on cash and working capital turnover. If conditions tighten, balance sheet management and capital allocation become more important. Remember, earnings without the corresponding cash flow don’t count for much.
- Re-examine your strategy and business model. Are they still relevant, and what adjustments would you make if conditions change?
- Conduct scenario planning. When doing your high-level planning, begin to think about different scenarios so that you can get ahead of possible changes in economic conditions. That way, you’ll be prepared in to shift gears if necessary.
I want to repeat that I am not writing this because I anticipate a serious problem. However, I know that the business cycle is just that – a cycle. It changes over time, and we can’t kid ourselves that great economic conditions will continue uninterrupted forever. I have also advised many companies in turnaround situations, in which conditions have changed drastically for the worse, and it was not fun.
So enjoy the high tide. Just make sure your swimsuit is on securely!
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