Notes from Nick
A quick recap of the key topics on digital agency owner’s minds.
A few months ago, I wrote about planning for cautious growth, and that advice hasn’t changed. Vetted investments into sales, marketing, and headcount still make sense as companies still demand digital solutions. It’s time to add another task: build your cash reserves.
Growing cash reserves is easily the most important thing you can focus on for the rest of 2022. Hoard that capital like a dragon hoards gold. Entering a recession with access to capital enables strategies like targeted M&A, talent acquisition, and product experimentation. Implementing these during a downturn acts as a force multiplier for their ROIs.
What’s taking so long?
Last week I was chatting with an agency owner who was frustrated with this kind of economic holding pattern everyone seems to be in.
The economy has felt strange this year. Since late in the first quarter, agency owners have been asking about a recession. During the second quarter, we began prepping clients for a downturn. We’re well into the third quarter now, and aside from some slowing inbound, no one I’ve talked to seems to have felt any major effects yet.
The catalyst
Recessions need a catalyst. Something that kicks them off and gets the pain started.
Back in 2000-2001, there was the dot-com crash, a period of rising Fed rate hikes, and then 9/11. The combination of those catalysts drove the Dow Jones down 7% in a single day,
The 2008 financial crisis, “The Great Recession,” began with a bursting housing bubble that decimated consumer spending and banks unsuccessfully playing hot potato with collateralized debt obligations. The unemployment rate took about a decade to fully recover.
We’re all too familiar with the catalyst that caused the 2020 shock…
It’s tough to say what will cause the next recession. It’s equally difficult to tell when it’ll occur. Timing economic events is gambling. The best we can do is use some early indicators to prepare shops for potential scenarios.
Where are we now?
While there are definitely some cracks beginning to show, the consumer seems to be in a much better position this time around. Taking a look at the recent Household Debt and Credit report from the NY Fed helps uncover some of the differences.
We’ve seen recent weakness in the housing market, but this surge (and subsequent slowing) in home buying was driven by more credit-worthy individuals. These buyers are less likely to default and trigger explosions at banking institutions than the sub-prime borrowers were in 08.
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The total balance of delinquent accounts is at historic lows.
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Employment levels and wage growth indicate even more consumer strength.
Things to worry about
In case you were feeling too optimistic, here are some spots to stress over.
There are challenges at home; while still in expansion territory, U.S. manufacturing PMI has been falling for over a year now. Services PMI isn’t far behind.
In addition, the supply chain bullwhip is here in full effect. Inventories are up, and sales growth has slowed across retailers. This will depress new orders and slow sales for manufacturers until the consumer can burn through the excess inventory sitting on shelves.
Oh yeah, inflation. It’s moderated a bit, but risks remain. The Federal Reserve appears to be on a warpath with interest rates. That alone can cause severe challenges for businesses. Inflation has also already caused a change in how 85% of U.S. consumers shop.
This all sums up to a kind of “meh” view on the economy.
Some scenarios
If we have a repeat of 08 and we’re hit with another deep, prolonged recession, cash-on-hand will allow you to make more strategic (vs. triage-based) decisions and provide a runway to outlast demand shortfalls. If it comes down to it, it’ll also give you time and resources to pivot.
If we avoid a major recession and instead experience stagflation, cash-on-hand gives you more options to find pockets of growth.
If we avoid a recession AND stagflation and we return to growth, you’ll be ready to deploy your dragon’s hoard of cash towards high-ROI activities.
Prep work
It’s tough to grow cash reserves without a solid foundation. Make sure you have the following in place by the end of the year, so you’re in the best position possible entering 2023.
- Have a clear mission/vision/purpose that leadership understands and agrees on
- Set and communicate detailed near-term, medium-term, and long-term goals
- Adopt semi-narrow positioning along industries
- Sell solutions, not services
- Understand your target industries pain points (even beyond the ones you solve) and trends
- Ensure you have the right roles present on your team and the right people in them
- Fix client concentration issues (5%-20% of revenue and keep industry exposure balanced)
- Optimize your revenue generation system
- Price appropriately (I’m begging you to stop discounting)
- Build out an accurate cashflow forecast model (you should have visibility 3-9 months out)
- Identify your key metrics and action-points when you’ll change course
- Ensure your structure matches your strategy
- Finally, optimize your utilization rates
Getting these dialed-in will maximize your cash flow and will provide you with options regardless of the future economic environment. If you want help with these, we cover them and more in our Comprehensive Growth Evaluation.
Feel free to reply to this email if you have any questions or if you’d like to learn more.
-Nick
