Economics » US companies take proactive approach in preparation for ‘possible recession’

US companies take proactive approach in preparation for ‘possible recession’

US-based companies focus on identifying spending cuts and supply chain inefficiencies as key economic indicators point to a recession in 2023

US companies take proactive approach in preparation for ‘possible recession’

US companies are switching away from growth-driven strategies and must take action to ensure future profitability amid an uncertain economic environment, says Tony Tiscornia, CFO at Coupa.

“We have seen over a decade of low interest rates and strong equity markets and there was a lot of free money available to enable companies to invest and grow,” he says.

“There is a major shift now – inflation has become an issue on a macro-level and to keep it in check, interest rates have been rising aggressively. On top of that, there are geopolitical issues to deal with, particularly the war in Ukraine and uncertainty over China.

“One thing I hear from my meetings with other CFOs is that whereas it was all about growth previously, investors now expect the focus to be on margins and profitability,” he continues.

“What CFOs need to do now is prioritise. They have to look at how they can conserve capital and cash; put much more thought into the investments they make; and slow down some projects. Growth is still important, but the focus must be on profit stability, cash conservation and navigating your business to survive – until you see the light at the end of the tunnel.”

Recessionary fears rise

Tiscornia explains that there is a “glimmer of hope” with US inflation declining in recent months.

According to data from Statistica, US 12-month inflation fell to 7.7% in October, down from its peak at 9.1% in June.

With consumer prices rising less than expected, smaller interest rate increases by the Fed could start in December.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Federal Reserve chairman Jerome Powell confirmed in a speech at the Brookings Institute on November 30.

In November, the Fed raised rates by 0.75% percentage points – its fourth consecutive hike this year.

“The good news is that inflation is down a couple of basis points,” says Tiscornia, pointing out that last month’s slight decline in inflation led to expectations that interest rate hikes are starting to make an impact.

“There is now a big debate as to whether the Fed will increase interest rates by 50 basis points or 75 basis points in December.

“There is, however, definitely talk of a recession and the general feeling is that there is a 50:50 chance there might be one. At present, business leaders and CFOs are preparing for the worst and hoping for the best.”

According to Craig Erlam, senior market analyst, UK and EMEA at OANDA, a slowdown in the pace of tightening has more support from within the Fed.

“A lower rate hike is on the cards in December – probably 50 basis points – while a higher terminal rate is only a possibility and will depend on the data.

“While not ideal for investors, the net effect is undoubtedly less hawkish,” he says.

Cost-cutting mode

Tiscornia believes that US companies today must focus on safeguarding their businesses and “futureproofing” them against a possible recession by analysing their spending in relation to both labour and the equipment and materials they source.

Many US companies are already doing this in relation to labour costs, he adds.

“From a top-line perspective, companies need to identify what parts of their business will grow from those that have less scope for growth. They also need to be very cautious when they are hiring people and we are already seeing hiring freezes – as well as lay-offs which can be very expensive,” he says.

“There is still competition when hiring. Six months ago, there was a very competitive market for labour but there are fewer opportunities for workers now. However, there is still competition in the technology sector, and it can still be difficult to hire talent.”

He explains that adverse geopolitical events are also having a major impact on US companies across all sectors – especially those which operate globally with customers and/or suppliers in other countries.

Many companies, which have traditionally sourced supplies from abroad, have seen their supply chains strained, prompting a rethink of how they source the goods, parts and equipment they need, says Tiscornia.

The ongoing zero-Covid strategy being pursued in China, in particular, has brought in major supply chain issues for many US companies.

“There has been a lot of focus on China in the past, but many companies are now looking at sourcing supplies from elsewhere. However, it takes time to get the infrastructure in place. Some leaders and CFOs are also looking to see if their sourced supplies could be developed locally in the US, but this is expensive because of the higher cost of labour,” he says.

“The greater need for supply chain resistance is across the board and is being faced by sectors from retail, led by large companies such as Walmart, to major players in the technology sector like Apple and Google,” continues Tiscornia, pointing out that supply chain issues they face are having a domino effect. “Many of these companies are increasing consumer prices and are also now working at lower margins.”

He explains that another major supply chain challenge for many US companies is that they have always worked on the basis of Just in Time delivery – but this approach has been evaluated over the last few years and become one of ‘Just in Case’.

“This has led many companies to build up extra inventory – but some of them have built up too much inventory. Inflation and lower consumer spending has meant that they now have inventory surpluses – and that inventory surplus has to be accounted for in their financial results,” he says.

Companies also need to look at all of their spending on suppliers.

“CFOs need to access as much data as they can on their contracts with suppliers and consider whether certain suppliers can be cut. Also, there should be a move to consolidate and optimise the supply chain,” says Tiscornia.

“MNCs have always operated in a very traditional way. When sourcing from local suppliers, many of them have sourced goods from the same 10-20 suppliers for several years. However, if they cut this back to one to two suppliers and consolidate all their spending with one or two suppliers, they will be providing them with more business. This will enable many companies to get better payment terms.”

He concludes: “It is really all about having the agility to meet fast market dynamics and changes in the economy. CFOs have to make decisions quickly and they need to be able to access data on everything – their employees, sales and supplier spending. They can make decisions much more quickly if they have all the data they need at their fingertips.”

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