Enjoying the Good Times, Preparing for the Bad, Redux

For several years I predicted that 2017 would be the year a recession would start. I began saying this about 2013 and for several years I thought my prediction looked good. But now it looks like I’m going to be wrong. The economic expansion continues with no end in sight. How long can this continue? When will it end? How bad will it be when it does end? Clearly I don’t know.

So I’ve asked others when they think the next recession will start. No one thinks the expansion will go forever; the next recession is a matter of when not if. And there is general concern that the longer the expansion goes, the worse the bust will be. But when?

I’ve heard people opine that it will be later in 2018. Some say 2019, even predicting a particular quarter. When do you think?

Sidebar: A couple of weeks ago, my son-in-law spent the weekend with his Army Reserve unit. On Sunday night he told me that they were doing long-lead planning for their unit being called to active duty. I asked, “Are you guys going back to the Middle East again?” He answered, “No, Korea.”

So now when do you think the next recession will start? My point, of course, is that recessions often start from natural economic cycles and sometime from ‘Black Swan’ events. A shooting war is Korea will almost guarantee a recession. Of course, the economic consequences aren’t the worst of a war. My wife is Korean and she has two sisters and their families in Seoul.

Back to (somewhat) happier thoughts. Most of my clients are enjoying record sales and profits. Let’s enjoy these good times, and this is as good as it gets, while being mindful that it can’t last forever. My advice is to remain watchful and vigilant by taking the following actions:

1. Do an SRO Budget each year. Your Realistic budget for 2018 is good discipline but also do a Survival budget and an Optimistic budget. The Survival budget is what you would do to get through hard times. If revenue suddenly dropped 25%, could you survive?
2. Monitor your financial performance monthly. Watch for signs of a downturn. Monitor trends. When the downturn comes, we always wish we would have reacted more quickly.
3. Use debt prudently. Typically don’t borrow more than 75 to 80 percent on any long-term asset. When lenders start offering 100 percent loans, that’s a bad sign.
4. Don’t be afraid to turn away business. If you don’t have the capacity to accommodate all the business available to you, that’s okay. With virtually all businesses unable to find enough skilled labor, you won’t be able to take on every opportunity available to you. Prioritize what business you will take by profitability rather than revenue. Also think about long-term relationships and which customers are likely to still be with you after the next recession.
5. Make a long-term plan. This gives you context for your annual planning. When making long-term plans, assume there will be one recession per decade. Your plan may even include using the downturns as an opportunity to acquire a competitor or the competitor’s customers.
6. Have an Objective Adviser. Having a trusted financial adviser who you trust and who is not emotionally invested in your business can help make the hard calls. Listen to their advice.