Growing a Business in a Volatile Economy

The Gross Domestic Product (GDP) is how we measure the output of our economy on a national scale. Investopedia defines the GDP as “…the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation’s overall economic activity. The GDP can be calculated using the following formula:

GDP = C + G + I + NX, where, C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports – Imports).”

A primer on the GDP can be found here.

The GDP is Just One Indicator

The GDP is one of several other leading economic indicators published by the Government (specifically, the Bureau of Economic Analysis which is part of the Department of Commerce) that will help you understand the general business climate in which you’re trying to operate your business here in the US.

And that climate is increasingly not good.

Using the interactive chart from Macrotrends, we find that our total debt-to-GDP ratio is roughly 3.5:1, meaning that for every dollar we’re outputting as a nation, we have 3.50 of debt. This debt figure includes both public and private debt since the GDP is a measurement that includes both public and private output.

But if you think this is overstated, consider that our national debt is now 100.5% of our national GDP. Our national debt is nearly $19T on a ~$18.5T economy. Consider further that our Federal unfunded mandates are roughly $127T (according to this Forbes article) and that State pensions are underfunded by nearly $1T dollars as well. Add it up. On ~$3.5T of income each year, the Federal government is supposed to somehow pay for $4.25T of spending and cover future obligations of $127T. You do the math.

Companies that are heavily leveraged don’t last long. Servicing their debt sucks up their cash flow and they’re unable to meet other obligations if sales dip for even a small segment of time. These companies live hand to mouth. The difference between highly leveraged companies and the US government is that the latter can just print more money to cover their obligations. But even this ability can only save our country for a period of time. Eventually this debt will sap our strength and stability and render us a 2nd or even 3rd world country. It’s just a matter of time.

If you’re a business owner, you should care about all this because your business will likely be taxed heavily in the future. If you think you’re being taxed a lot now – just live another 30 years. In their book The Coming Generational Storm, the authors predict that a “fiscal child abuse” will double the taxes paid by the younger generation. I can’t imagine that businesses won’t be heavily taxed as well. And I predict the younger generations will rise up and call us (the baby boomers) what we are: the most selfish and self-absorbed, yet the most dysfunctional generation this world has ever seen. And they will be right.

The GDP also helps us understand trends in our economy. You’ll notice in the last four years, our growth has not been consistent. Eight of the last 16 quarters have had a GDP growth of less than 2%, which really means our economy was contracting in those quarters. Our economy grows, the contracts, then grows, then contracts. That’s a tough economy in which to run a small business. Okun’s law will assert that a 1% decrease in unemployment will result in a 2% increase in the GDP. Of course, the opposite could be said to be true as well. The larger point is that in those quarters with less growth, more distress or unhealthiness in the economy might have negatively impacted your business. There’s no reason to believe this up/down economy will level out. It’s tough to grow a company in a volitile economy.

Growing Your Business

Even though it’s tough to grow a business in a flat economy, it’s not impossible. Here are some tips on growing your business in a flat economy.

Carefully Control Expenses

It might seem obvious, but it’s not. I’m surprised at how many small businesses (< $100MM) don’t pay enough attention to expenses. But it’s paramount that this is done. For example, I know of one business that was doing $90M/year in sales three years ago and today, it’s doing $60M. Yet their payroll remains the same and their lines of credit are over 90% utilized. When I talk about controlling expenses, I’m not talking about counting paper clips. I’m talking about getting you’re the core drivers of expenses under control. Ask yourself questions like “Can I get the same sales with one less sales person?” or “can I outsource this function to a third-party for less money” or “is it a good time to negotiate down my facilities costs?” Look at the core cost drivers – especially your fixed costs. Get your break-even down as far as possible by making as many expenses variable or COGS (Cost of Goods Sold) expenses, then get under it and stay there.

Focus on Higher Margin Products and Services

More top line income is irrelevant if you’re net profits are not increasing. Would you rather net $1MM on $10MM of sales or $100MM of sales. That answer is easy: $10MM is better because it would require less cycles to net that $1MM of profit. Every business has products or services that are more profitable than others. Your goal is to figure out how to sell as much of your higher margin products and services while figuring out how to sell less of the other. If possible cut out those products that break even or don’t make money. Sell them off or discontinue them. Focus as much of your business on the higher margin products and services as possible, even if this means cutting your top line revenue and shrinking the overall size of your business.

Invest in Insights

I cannot stress enough that getting financial reports from your accounting system isn’t enough to understand your business. This was one of the mistakes I made in my business – I thought I understood my business by looking at the income statement. At the time, I didn’t know how to read a balance sheet and I rarely, if ever ran a cash flow statement. You’ll need these three core reports, but you should have an outside consultant objectively look at your business and your financials. I’m not talking about your accountant – I’m talking about someone who interprets financial information to understand the story the numbers are relaying. To this end, read Creating Shareholder Value, a standard book for those who read financial reports and know how to turn the numbers into insights.

In addition, you need to figure out what the core measurements are for your business. We often call them KPIs – Key Performance Indicators. If you don’t measure your KPIs, you’ll forever be flying blind in your decision-making. Usually, an outside consultant can help with this, but if you can do this on your own, go for it.

Build Cash – and Lots of It

Your only real defense to a fluctuating economy where, presumably, your sales go up and down is a stash of cash. And in an over-regulated economy where compliance to regulations drive up costs, your only defense is cash. Where possible, keep your appetite for spending money at bay and build cash in your business. It will help you in the long run to have it sitting there, ready to cover the down times when you need it.

Get Some Coaching

Finally, if Peyton Manning, Tom Brady, Adrianne Peterson and other multi-million dollar athletes get coaching to improve their performance, then you should too. Find a good executive coach and then keep them for several years. Learn from them. Grow your skills as a CEO by working with them. I am an Executive Coach – you can contact me here. But here is another executive coach who has way more experience than I. And I highly recommend him.

In a turbulent economy, you need to focus on those activities that will help you. Based on these tips, your KPIs should be product margin, cash on hand and your break-even point. If you need additional help analyzing your business, be sure to get the appropriate help.

Bill English