There’s no question businesses have been feeling the pinch of economic pressures during the past year, and while navigating them continues to be a challenge, some of these issues stem from seeds planted during a strong economy. When all economic boats are rising, it can be tempting for management teams to focus on growth at the cost of foundational relationships and prudent business practices, creating a false sense of success that rarely withstands volatility.
Being aware of and proactively managing the following five blind spots can make all the difference when preparing for headwinds. As Abraham Lincoln said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.”
1. Inelastic contracts
If competitive pressures drive pricing behaviors, then sound pricing habits can create margin stability. When cost-plus contracts are not accepted as standard market terms, many companies accept the risk of inelastic fixed-price contracts without proper mitigants, which can expose the business to excessive risk.
To further protect themselves, businesses should put provisions in place that flex with variable core material costs when appropriate. The timing and extent of these contract clauses are usually understood by customers who have been through previous economic cycles and have experienced fluctuations in material costs. For instance, if prices of concrete increase during the contract, the business can pass along the increased material costs to the customer. If customers are unwilling to accept a provision related to core material costs, they may be the wrong customer.
2. Untested or short vendor relationships
Reliable vendors are important to the success of any business, and just as management teams are being tested today, so are vendors. The value of a quality vendor is usually measured during challenging times, but businesses don’t need to wait for declining external factors to surround their company with quality vendors.
A sign of a strong vendor is not just one that has weathered economic cycles with you and is transparent in how they define success, but their definition should also be aligned with your business vision and values.
3. Top line revenue at the cost of margin
In a time when inflationary pressure can make margins more difficult to achieve, some businesses may be inexperienced at measuring the price sensitivity of their customers. It’s easy for a management team to avoid difficult conversations with customers because of a fear of how the customer will respond.
Remember, good customers have a relationship with the value a business provides, and good customers will usually listen to value. A customer base who is loyal to price is unsustainable, and any customer who is only focused on price over value is the best referral a business can give to their competitors.
4. Stale succession plan
Not only should a management team consider a succession plan that is built for stability, rapid growth and recessionary environments, but the plan should also adapt when there are changes in key managers, employees and company owners.
A succession plan is one of the most important strategies a business can create—and is often one of the least updated. At a minimum, management teams should annually review their plans and make changes as appropriate. In times of extreme change or volatility, additional reviews may be warranted.
5. Inflexible financial institution
As the economic environment shifts from growth to uncertainty, customers can truly evaluate the strength and stability of a bank. A strong, stable bank means it has the ability to consistently provide sustained value and solutions through all economic cycles.
An inelastic bank balance sheet with limited access to liquidity creates a lack of flexibility and nimbleness, both of which are needed to fully support businesses in all economic times. From executing mergers and acquisitions, navigating change or capturing market share, having a bank that can fully support and advise you in all cycles is critical.
In addition to avoiding these blind spots, it’s also important to remember that success looks different for each company. Clearly define what your key indicators of success are, measure them and avoid deviating from your long-term goals. Managing unintended blind spots requires focus, discipline, and intentionality. While being mindful of these alone won’t guarantee success, they can significantly increase the odds of favorable business outcomes.
This article is educational only. Please consult your financial and tax professionals. If you are interested in learning more about how UMB can help your business, visit our website.