Six daunting economic challenges family business owners can face

Family business owners are still managing in uncertainty, but the current environment is proving extremely difficult to manage. Homeowners face the highest inflation since 1981. The Fed is raising interest rates sharply to stop a spiral in wages and prices. But it could still trigger a recession this year, most economists think. All of this is happening as hiring remains difficult and distorted supply chains further hamper business operations.

Phew! Faced with these adverse conditions, how can entrepreneurs meet these challenges? At a recent employee-owned S Corporations of America (ESCA) conference, executives from some of the nation's largest ESOP companies shared their insights. Here are six business primacies they relayed:

1. In the short term, rising interest rates pose the greatest challenge. CFOs need to focus on managing working capital and making sure their company's balance sheet is strong. Lengthening maturities to relieve short-term funding pressures and hedging some floating rate exposures through swaps or a term facility can be wise moves.

2. The prospect of a recession is the next most pressing issue, and business leaders said the actions they took after the first wave of COVID-19 in early 2020 proved a dress rehearsal for the measures they were considering: rapidly cutting costs to preserve cash flow due to declining revenues. Ranking your most critical initiatives will help you identify where to cut back without compromising core functions. Proactively reach out to lenders and let them know what action is being taken. Lenders will appreciate this, and goodwill will lay the groundwork if you need to approach them for loan waivers or modifications.

3. In the longer term, inflation is the most worrying, and it can be difficult to control since, as management consultant Ram Charon sees, business leaders have lost the muscle memory to cope with soaring prices. , which they have not faced for almost 40 years. Operating in a rising cost environment emphasizes prudent product pricing, cost control through deliberate purchasing, and working capital management that includes keeping accounts receivable as low as possible. As Charon notes, CEOs need to sound the alarm bells internally on inflation as enemy No. 1 to ensure finance, HR, procurement, marketing and other functions respond in a coordinated way to challenges inflation.

4. Since employee engagement is especially critical in these stressful scenarios, explain to your employees the impact of rising interest rates, inflation, or a recession on your business. Communicate your strategy for getting through tough times. This is also the time to solicit employee suggestions for cost savings and wooing customers.

5. When it comes to talent and the intense pressure to find and land superior staff, your human resources team should work with your leadership team to identify and retain your best employees. And now may be a good time to pursue strategic talent acquisitions that would have proven impossible before, and to recognize that young talent is looking for personal and professional development to advance their careers.

6. Successful CEOs will convene a "war council" of their senior executives to demonstrate the urgency of the current moment and get their perspective on the challenges affecting your business. You need your leadership team to understand the implications so that they avoid considering their own specific silo and focus on the whole operation to get your business through a tough time.

Boards and advisors: Private company executives encouraged reaching out to the board and advisors for their perspective. Ideally, your board will be made up of directors with diverse skills and perspectives. Some have likely experienced previous recession cycles or past periods of inflation and rising interest rates and can share useful insights.

Strategic Planning: Putting day-to-day operations aside, participants see it as essential to step back and focus on what you see as the future of the business. If you have completed a strategic planning exercise, you will have reflected on business objectives and identified key and secondary priorities as well as current and future risks. In times of stress, you will want to accumulate capital that supports the most opportunistic initiatives and limit resources, or cut lower priority or riskier projects altogether. If you haven't completed such an exercise, doing it now will give you confidence in the actions you are taking and limit reflexive but short-sighted actions that harm the business.

M&A: Rising interest rates and recessions typically lead to reduced transaction volumes, and completed deals can be low...