The Right Way to Manage Risk in a Recession? Don’t Overreact

The Right Way to Manage Risk in a Recession? Don’t Overreact

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With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.

When a potential economic downtown is on the horizon, cutting costs is one of the first steps businesses take to minimize risk. But moving too aggressively could undermine what made a company successful in the first place — and leave it vulnerable to additional hazards.

“One of the worst things a company can do in an economic slowdown is take draconian measures to get back to profitability,” says Michael Gallagher, managing director of CBIZ’s Risk Advisory Services practice. Businesses aiming at double-digit cost reductions could end up slashing themselves into a corner, especially when it comes to areas such as cybersecurity or talent, he says. “In this tight labor market, moves like that can send a company into a tailspin.”

Below, we’ll discuss what measures finance leaders should take to weather the economic turbulence ahead — and what tactics they should avoid altogether.

Switching Gears in an Uncertain Economy

Last year, spending ballooned as businesses raced to meet soaring demand for consumer goods. Companies in the S&P 500 allocated more than $520 billion toward capital projects during the first nine months of 2021, buying up distribution centers and corporate infrastructure to better serve customers’ needs.

Now, as rising inflation increases costs for everything from raw materials to transportation, finance chiefs are looking to rein in operating expenses. Companies like Amazon, for example, have taken substantial steps in this direction. Since last July, the e-commerce giant has been subleasing unused warehouse space, reducing the number of hourly employees and holding off on new construction. The strategy appears to be paying off: Amazon swung back to a profit in the third quarter, though the company warned it could miss earnings expectations for the fourth quarter, citing the challenging macroeconomic environment, and the company is in the midst of substantial job cuts across several of its businesses.  

But a shift to frugality isn’t always effective. As earnings sag, executives face intense pressure to restore profitability “any way they can,” Gallagher says. Finance leaders who don’t know how to prioritize long-term considerations over short-term gains often end up “stepping over dollars to pick up dimes.”

Grab the Low Hanging Fruit

Instead, businesses should implement methodical cost-recovery measures to reel in overspending — focusing on areas like accounts payable discrepancies and technological oversights. For example, companies often overpay, or double-pay invoices as a result of cumbersome accounts payable processes. By reviewing accounts payable history and conducting a thorough audit, a trove of “missing” capital can be recovered for the company. To avoid similar issues in the future, companies should also identify faulty controls and processes, and either modify them or put additional ones in place.

Taking a closer look at the corporate cell phone bill is another effective way to recover costs. Imagine a company with close to 4,000 employees, each of which have their own service package and wireless hotspot. Is the company getting the lowest market rate on each service bundle? And is every account still active? After all, many lines may remain open even after an employee has left the company.

Segregate Duties — And Make Contingency Plans

Fraud tends to go up in an economic downturn. To minimize risk, companies should examine their processes and procedures in areas where money flows in and out of the business. For example, no company should rely on the same person to invoice companies and collect payments. The resulting lack of accountability and oversight opens the door for embezzlement, and in turn, instability. Instead, companies should segregate duties, and put controls in places where fraudulent activity can adversely affect their business.

Organizations should also adopt contingency plans to guard against critical vulnerabilities, such as a single point of failure in their supply chain. For example, the 2022 closure of a baby formula production plant owned and operated by healthcare giant Abbot spurred a dramatic drop in revenue to the tune of $280 million — the kind of impact that in a downturn could end up capsizing a smaller company entirely. 

An Opportunity for Transformation

Whether the economy is booming or heading into a tailspin, companies can’t afford to cut corners. Fast-growing companies that are looking to go public or seek financing from major investors need to inspire stakeholder confidence by providing sophisticated information about their finances, operations and business results.

To do that, organizations will need to update their IT systems and processes. As cybercrime and cyberterrorism becomes more sophisticated — cyberattacks against organizations around the globe increased by 50% last year — maintaining servers and protecting corporate data has become table stakes for companies looking to attract investors. Those that push off these improvements could be looking at a multi-million-dollar ransom to get their information back.

Additionally, businesses feeling the pinch from the economic slowdown should initiate cost-recovery audits and pivot toward new technologies, like AI-tracking systems, cloud-based ERPs and third-party APIs. Those still flying high, like the energy industry, would do well to anticipate future risk by investing heavily to meet upcoming compliance deadlines — especially if they are ESG-related.

Most importantly, companies should engage partners to assist with any necessary audit compliance now, rather than later. A project is always more successful — and a third to half the cost — when done in advance, rather than a month before going public.

“If your company is looking to make wholesale personnel changes, now is the ideal moment to start,” says Gallagher. “The only way for finance leaders to make lemons out of lemonade is to stay up to date on new technologies, take calculated risks and get the support of the board in making long-term changes. By adhering to these principles, they can enhance strategic decision making, drive efficiencies and save the business money.”

Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

The Right Way to Manage Risk in a Recession? Don’t Overreact't-Overreact.jpg?ver=AFX6y8di6orKi8gamELURw%3d%3d uncertain economy can throw your business in flux. Use these measures to help your business effectively manage risk.2023-01-18T20:00:00-05:00

An uncertain economy can throw your business in flux. Use these measuresto help your business effectively manage risk.

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