Alberta’s economic recovery: is your business ready for it?
Alberta has endured many recessions over the years but none in recent times have been as crippling as the one that struck in 2014. Ask any Albertan and they’ll be able to tell you how it has affected their family, neighbours, and friends. As Business and Financial Advisors, we understand. We’ve received panicked phone calls from clients; heard the frustration in their voices, and seen the troubled look in their eyes while making difficult decisions in their business. There’s no doubt these wounds are still fresh; and entrepreneurs, banks, and advisors remain reluctant to celebrate the recent headlines suggesting there’s a light at the end of this seemingly never-ending tunnel.
Alberta’s entrepreneurs face a unique challenge as they weather the tail-end of this recession. How can they emerge successful and ready to take on new business while the bony hand of the recession maintains such a tight grip? We interviewed two of our firm’s Partners: Josh Ronald and Karen Knowlton, to get their insights on the current economic landscape and advice for how to ride out the remainder of this recession and come out the other side better and more prepared than before.
On conflicting headlines in the media:
“It’s certainly encouraging to hear good news, but it’s perplexing because what we’re seeing with our clients doesn’t necessarily correlate with those headlines,” said Karen. Because the recession hit each sector at a different time, everyone’s recovery time varies. Some of our clients in the drilling industry are buying new rigs and using all of their equipment for the first time since 2014. Conversely, other clients in retail, construction and food/beverage industries are still working to stay as lean as possible.
From where we sit, the mood has lightened over the last six months. Client meetings have become significantly more positive; focused on growth opportunities and how to make businesses even better than before the recession struck. “It’s been a rough ride but these conversations are positive indications that things are picking up,” said Josh. However, entrepreneurs, banks, and investors are justifiably shell-shocked, and until the economy stabilizes for at least six months, Josh doesn’t foresee entrepreneurs celebrating prematurely.
What entrepreneurs should do to weather this storm:
Cost control is one of the most common solutions we’ve recommended and helped clients put into place over the past two years. “In dark times, entrepreneurs are often focused on simply surviving – it’s (understandably) hard for them to think about the future,” Karen said. The biggest challenge entrepreneurs will face in 2018 is finding the right level of costs for where their business is going to be. For example, clients might have potential work lined up, so they retain their staff in order to complete the jobs – but what happens if the projects get canceled or delayed? Or on the flip side, what if you carry out layoffs and then a ton of unexpected work comes in? Anticipating the right number of staff is key to a business’ success.
“Anticipating the right number of staff is key to a business’ success.”
As many businesses have faced the possibility or reality of layoffs over the last four years, it’s paramount to find that “bottom.” This is a very dicey area that requires guidance. “You need to know how to plan cautiously and strike a healthy balance between what the business needs now, and what it’s going to need to succeed when the market starts to heat up again,” Karen said.
Discussions about differentiation will be important this year. All business owners work hard to offer something different than their competitors. In good economic times, these differentiators are deemed valuable and factor into business relationships. According to Josh, rules that used to apply have gone out the window. “What we’ve been witnessing is a four-year-long knife fight, where cost trumps differentiation.”
It’s been disheartening to see clients lose projects to a lower-bid. In this downturn, companies with little to no business history are winning bids instead of experienced companies with good track records, who have worked hard for 10+ years to offer something special. These projects will eventually return to the worthy (when the inexperienced companies fail to deliver), but in the meantime, these lost bids have resulted in a severe lack of work, which forces employers to make difficult business decisions. It’s recommended that entrepreneurs take this time to deeply examine their business offerings – especially their differentiators – and analyze areas where they can become leaner. If the customer doesn’t value their differentiators, should they be kept?
Stawowski McGill advises entrepreneurs not to delay in proactively communicating with the banks. Borrowing money from a bank isn’t without its challenges on a regular day, but with a beaten-up balance sheet and an income statement showing 1-2 years of losses, it’s even more difficult. Even with great historical earnings, banks are naturally wary of new lending. Having anadvisor who speaks the same financial language as bankers is highly advantageous as they can provide context to the otherwise raw numbers. This means that your company controls the story, rather than leaving the banks to interpret it for themselves. Engaging an advisor who builds strong relationships with lenders will help move businesses into the recovery stage.
“Engaging an advisor who builds strong relationships with lenders will help move businesses into the recovery stage.”
When times are good, it’s easy to talk about business. But when times are tough, many entrepreneurs tend to play their cards close to their chest. As the old proverb goes, “it’s lonely at the top.” Entrepreneurs need someone in their corner.
“Business owners seem to find some peace of mind in our stories and insights; they take comfort in knowing they’re not alone,” Karen said. “We know how emotional this recession has been and how easy it is for emotions to get mixed into decision-making. When you work so closely with your clients and you know they’re at one of the most challenging points in their lives, you start to lose sleep too.”
How to prepare for the economic rebound:
Forecasting should be a priority for entrepreneurs. In our unique economy, we need to be prepared for both the boom and the bust. When the economy bounces back, every company will face the “boom” pressures. If businesses have implemented stringent cost-saving measures in order to survive the recession, owners should be cognizant that rapid growth in a boom can cause costs to balloon, potentially putting the business in a vulnerable position when the economy dips again. It’s a fine balance to keep costs in line with growth and to be careful not to take on more work than you can handle. If financials aren’t your forte, it will be to your benefit to engage a financial advisor to help you forecast and learn how your decisions can affect your business in the long term.
“Forecasting ‘what-if’ scenarios has been a critical tool in giving business owners the clarity they’re looking for,” Karen said. “Forecasting not only the revenues and expenses is critical, the balance sheet and future cash position of the company becomes integral in discussions with lenders.”
“If you can provide the banks with clarity and confidence in your business, it will give you an edge in aggressively bringing in more business.”
If you realize, after forecasting, that your business requires more support from the bank in order to move forward, now is the time to begin that process. If you can provide the banks with clarity and confidence in your business, it will give you an edge in aggressively bringing in more business.
We can’t over-emphasize the importance of maintaining a strong balance sheet. As Albertans, we know that a downturn strikes roughly every 5-7 years in this province and a big part of an Advisor’s job is to help business owners prepare for it. A balance sheet gives you a clear picture of your business’ ratios and its overall health. Entering into a downturn with this vital information will help you make decisions confidently. “Without it, things can get scary, quickly – it’s like driving blind, financially speaking,” said Josh. “Many small business owners struggle with balance sheets; even those with 30+ years of business experience. Certainly, that’s one of the reasons they engage us as Advisors.”
Karen advises many of her clients to manage their overhead costs. If done effectively, clients will come out the other side in a more advantaged position. “When the dust settles and sales start to come in, you’ll become more profitable more quickly – and you’ll be thankful you did what was necessary to keep your overhead low,” she said, adding that businesses who stay lean will come out ahead of their competitors.
Though perhaps an overused narrative in Alberta, diversification has helped push many entrepreneurs through the recession. Business is booming in other countries and if there’s an opportunity to diversify your business, it’s worthy of exploration. The biggest challenge for owners when it comes to diversification is the amount of time that they have to put into it; many don’t realize the extent of the effort required at the outset. This is one reason why our firm hosts a yearly “planning day” in which clients spend the day with their advisor to analyze their company’s position in the market, openly discuss diversification ambitions, and formalize a plan to execute.
There’s no doubt that the last four years have been unkind to Alberta. It has been a time of suffering for many, and like the rest of the province, we are looking forward to better days. While we are seeing positive indications that the fog is lifting (in both the media and in our interactions with clients), we suggest entrepreneurs take this time to critically analyze their businesses with a forward-looking mindset. Now is the time to get your company ready to face what comes next. Having a professional business and financial ally to help you plan, keep your numbers in check, explore potential opportunities, and communicate with financial institutions will help you emerge with the knowledge and confidence to propel your business into the future.