No matter how far out the tide is, all waves eventually return to shore. The same is true with business cycles.
We have experienced a particularly good period in business over the past decade or so. After experiencing a difficult recession, our economy rebounded strongly. Many of us have not only regained but grown our personal wealth as a result. It has been fun to participate in this Bull Market. Business conversations are much less strained when the biggest concerns you have are around managing your growth and not having enough employees. However, all business cycles have peaks and valleys. Anything that goes up will eventually come down (or at least slow down considerably). Even the beautiful and powerful waves eventually crash into the shore.
It’s important when times are good not to take the situation for granted. When the wave is cresting, ride it. Use this period as an opportunity to pay down debt, make strategic investments, enhance margins, and increase cash reserves. You can hedge your bets a bit more without worrying about too much market risk and/or volatility. It becomes possible to strengthen both your business and personal balance sheets. Up cycles are what make the responsibilities and rigors of business ownership/leadership worth it.
I cannot predict when the next recession will occur. I can only guess. There are some early indicators suggesting that a correction may be on the horizon in our not-too-distant future. I also don’t know how long or how deep the next market correction will last. All I can say with certainty is that it will happen, and there will be some adverse consequences for most businesses.
My gut tells me that it is not the time for business leaders to double down on high-risk possibilities but instead to begin taking a more careful and thoughtful approach. Don’t assume that cheap debt will last forever, especially if you are vulnerable to variable interest rates. Lock in your rates now if you can. If you are nearing your debt limits or pushing against loan covenants, it may be time to tighten your financial situation to create a larger cushion. Look for opportunities to enhance your margins by optimizing pricing and increasing efficiencies. Take steps to minimize your company’s financial exposure.
The good news is that smart businesses can even benefit from a downturn. If others are struggling under the weight of bad or mistimed financial decisions, there might be opportunities for you to benefit at a reduced cost. All your competitors who have merely ridden the industry wave without doing anything special will be exposed. You may be able to leverage your strong cash position to negotiate better business deals and acquire other available companies and/or top talent. To paraphrase Warren Buffett, “When everyone else is nervous and selling, that’s when we gain our confidence and find our best buying opportunities.” However, you need to be in a strong economic position to do this.
Even though all waves do crash to shore, most of the water still returns to the ocean to once again reform in a new wave configuration. Cycles follow patterns. Thank goodness, business leaders are a resilient group. The best ones practice proactive, not reactive, resilience. They don’t just navigate where they are now but also where the ocean current is taking them. They position themselves to ride the waves higher and longer than anyone else, but don’t operate under the illusion that any given wave will not end. It’s the ability to stay in the water to keep finding and surfing waves when others can’t or won’t that will ultimately lead to your business success.