The Botkeeper blog will be taking a break for the holidays. We'll resume regular posts January 4, 2023!
Talk about your hot topics. And like so many things these days, highly charged to boot: is the U.S. in a recession?
The definition of a recession varies a bit depending on your source, but all agree it consists of a sustained period of shrinking GDP — anywhere from a few months to a few quarters. From there, the definition becomes considerably more complex: employment, consumer spending, business spending, income, industrial production, and prices are all also figured into the mix.
The U.S. economy is anything but simple, and it's a mistake to view it in terms of a single measure, such as GDP. True, GDP did shrink modestly in Q1 and Q2 of this year; however, it grew in Q3. Factor in that the labor market remained extremely hot in the first half of the year — but cooled off slightly in the third quarter — while the overall unemployment rate remained at historically low levels, and there is sure to be some confusion.
Now add inflation into the picture. Economists, both academic and amateur, love to debate whether inflation is a harbinger of recession or merely a symptom of it. As prices rise, spending drops. Unemployment rises. Production falls. All the markers of a recession come into play. The aggressive increases we’ve seen to the federal interest rate make borrowing to cover costs more expensive, drive up lease rates, and make everything from housing to cars harder to buy.
So for most experts, even if not all — no, the U.S. is not currently in a recession. But many feel inflation signals that it’s all about to change. Former Boston Federal Reserve President Eric Rosengren recently commented he felt a “mild recession” would occur in 2023, and that the Fed wouldn’t see a terminal rate until somewhere above 5.5%. That’s a level not seen in the U.S. since around 2008, which not coincidentally was the last major economic downturn in the U.S.
Accounting is typically thought of as somewhat recession proof. Businesses still need to produce financial reports, pay taxes, have independent audits conducted, etc. For the most part, it’s true — accounting firms tend to weather economic storms fairly well, though they might not see growth so much as a flattening. However, that doesn’t mean a firm’s clients are recession-proof.
It’s also worth noting that from the Big 4 on down, many firms cut staff in 2008 to address reductions in revenue. That’s something no firm enjoys doing, but there’s a major difference between 2022 and 2008: the talent shortage has only gotten worse. Much worse. Many firms have fought tooth and nail to get the staff they currently have. The prospect of losing any of them only to need to look again in a year or so is… let’s just say “not terribly attractive.”
So what to do? Or more to the point, what not to do? Should a recession materialize in 2023, there are three mistakes you’ll want to avoid to keep your firm on track:
We just discussed staffing cuts as a possible result of falling revenues firms might experience in 2023. It happened in 2008, how can you possibly avoid them in 2023?
How you can avoid them, however, isn’t what you should focus on. Instead, we need to focus on what happens if we don’t. The labor market in 2022 is a far cry from 2008. The Great Resignation, remote work as an expectation, and quiet quitting simply didn’t exist in 2008. Accounting grads have dropped precipitously. Recession or not, these factors are in play in 2022. Losing staff increases stress on the employees remaining. But what we’ve learned in the past few years is that employees are nowhere near as risk averse as they once were when it comes to selecting unemployment. In short: as their stress increases, they’re more likely than ever to quit.
It doesn’t take much analysis to see how your firm can’t afford for employees to self-select out after you’ve already cut your staff.
The smart bet is this, if you find you MUST reduce staff: do so with surgical precision, and do everything you can to reallocate that work to cause minimal disruption to your remaining staff. The better option is to hold off on staff reduction, looking for other ways either to increase revenue or cut expenses.
Otherwise, you might find yourself in a very uncomfortable position.
2. Ignoring new service lines
A recession is the perfect time to focus on increasing margins. For many firms, that means turning to higher-value services such as advisory, and away from low-return services that eat capacity and time.
If your firm has been paying attention, it’s pretty likely you’ve already dipped a toe in the Client Advisory Services pool at the very least. If you haven’t, you’d be well-advised to start now. Maximizing CAS services takes some time, and you don’t want to be caught not having a good market solution when you need to explore ways to increase your revenue.
A CAS practice has deep dedication to client service, which can be an invaluable market differentiator for your firm in the midst of an economic downturn. CAS services drive client interaction, require thoughtful inputs and informed analysis, and synthesize actionable intelligence. They then demand suggestions as to what those actions should be, supported by the analysis and the data that informed it.
In other words, it bonds your firm tightly to the client. CAS services make your firm an indispensable partner whose data-driven insights propel clients to new heights.
3. Not investing in new equipment or tech that will actually save money in the long run
It can be easy to snap the old pocketbook shut and put it on the shelf when the economy is sagging. Spending less is often a very reasonable and logical response to reduced revenue or less-than-rosy projections. But what about when spending can actually SAVE you money in the long run? Those are opportunities you should evaluate carefully.
Spending a little now to save a lot down the road is a smart move, even in a recession. The trick is in understanding and verifying your ROI. While no one knows how long a recession could last, it probably wouldn’t make sense to spend big right now on something that will take years to pay for itself. But there are plenty of smaller expenditures you can make that offer fast returns on your investment. Here are some questions you should ask when considering them:
How does the expenditure return investment to me? Cost savings? Time savings?
Can I easily measure the ROI?
Is the length of time the expenditure will take to return my investment likely to be longer than the recession? If so, should I wait?
Is my return likely to be direct (you’ll quickly see more of what you’re trying to save) or indirect (for example: the expenditure saves your staff time they can spend on new prospects or services that increase your revenue)?
And hey, speaking of great ROI for a small investment, have you looked at Botkeeper? You really should, and I’m not just saying that because they pay my salary. Investing in Botkeeper’s automated bookkeeping solution now can show your firm savings in as little as six months—welcome news for firms grappling with a possible recession.
Firms that thrive set themselves apart by working smarter. That means automating low-return tasks like bookkeeping. Botkeeper vastly improves the accuracy and timeliness of your clients’ books, while opening up your firm’s capacity and reducing its bookkeeping expenses. It’s a good start to preparing yourself for what might be a tough road ahead.
“Recession” can be a scary word. But with the right approach and attitude, your firm can easily weather the rough seas ahead — and help advise your clients so they can do the same.