Act now to protect against shortages and looming recession
“As businesses face the second half of 2022, a continuation of shortages, inflation and an impending recession are expected.”
Randy Sadler, CIC Services
The world certainly doesn’t need another crisis, but here we are. Following the COVID-19 pandemic, civil unrest in the US and the war in the Ukraine, shortages have struck nations across the globe.Although in some areas the shortages are merely causing annoyance among customers looking for their go-to choices at the grocery store, a leading global health figure, Peter Sands, the executive director of the Global Fund to Fight AIDS, warns that the food shortage could be “just as deadly” as an airborne pandemic.While food shortages may be the most vital concern, just put the term “shortages 2022” into a search engine and be prepared for an onslaught of headlines naming other products or materials in short supply, such as:
- “Off the charts” chemical shortages hit US farms
- Fuel shortage could be worse than 1970s oil crisis
- Tampon shortage is supply chain problem no-one’s talking about
- The drug shortage crisis in the US
- Deadly shortages: scarcity of key materials squeezes mask manufacturing
- How the US got into a baby formula mess
The current shortages highlight supply chain vulnerabilities and impact a variety industries and businesses, from large to small. The supply chain disruptions have caused issues including price increases and loss of customers. The Bank of America “
” of more than 1,000 business owners found that 76 percent say supply chain issues are impacting their business—and 88 percent say inflation is impacting their business.In terms of outlook, the issues aren’t suspected to subside any time soon. In fact, experts say it could be two more years. Flavio Macau, an associate professor in supply chains at Edith Cowan University in Western Australia, expects it will take to mid-2024 to get back to normal due to the chain of disruptions the global supply chain has faced—especially in North America where shipping companies have experienced some of the worst delays.The current pressure on supply chains, and resulting shortages and inflation, will have broader impact: economists predict a looming but mild recession in the US by the end of 2022. The analysis comes as Treasury Secretary Janet Yellen said “unacceptably high” prices are likely to stick with consumers through 2022, and she expects the US economy to slow down.
As businesses face the second half of 2022, a continuation of shortages, inflation and an impending recession are expected. Businesses should be asking themselves: “What can be done to recession-proof our business?” It behoves businesses to take the following actions, starting now:Consider an acquisition An economic downturn can be the right time to pull the trigger on a sought-after acquisition. In a May 2020 Harvard Business Review article titled “The Case for M&A in a Downturn”, author Brian Salsberg explains deal premiums are likely to come down and assets that companies had been reluctant to sell may become available during a recession. An analysis of evidence from the global financial crisis shows that companies that made significant acquisitions outperformed those that did not.
Cut higher-interest debt If your business has enough cash on hand to pay expenses, then it’s helpful to take a look at interest rates on debt and consider paying off loans or credit cards. When anticipating a business downturn, spending less money on interest can improve profitability.
Strengthen your supply chain A globalised supply chain has benefits such as lower costs, but when disruption is happening all over the world, a global supply chain becomes risky. Thus, some businesses pursue de-globalisation, by which the supply chain is brought closer to home. But, Noriko Chen, a Capital Group equity portfolio manager, expects companies will further diversity to other countries in an era of “re-globalisation” in which supply chains are reorganised and more countries brought into the global trade networks.
Build a cash reserve Liquidity is essential during a recession to be able to cover expenses should the business take a revenue hit or incur unexpected costs. This also ensures investments and assets won’t need to be sold to cover costs. This is an ideal time to evaluate financial statements and monitor cash flow to secure a stronger financial position in the lead-up to a downtown.
Know your insurance A common mistake businesses made prior to the COVID-19 pandemic was assuming their insurance would cover pandemic related losses—or that their business interruption insurance claims would be paid. Unfortunately, insurance (particularly third-party commercial insurance) is often riddled with gaps and exclusions that can lead to a claim not being paid.
“A captive insurance company allows a business to be prepared to survive both supply chain disruption and a recession.”
As supply chain issues worsen, businesses should act now and review their insurance policies and risk profiles. This will help determine whether business interruption insurance is enough—or whether a broader supply chain insurance policy should be added.One way to manage risk via insurance and accumulate cash reserves is by owning a captive insurance company. Captives can write broad coverage for losses, including policies with few policy exclusions. Captives can also insure gaps in commercial policies. In terms of risk, this ensures a business can be protected against likely threats with more assurance the claim will be paid.Since the captive is owned by the business or business owner, premiums paid minus claims are retained as profit. Thus, a captive allows a business to vertically integrate by owning its own insurance company. By accumulating profit and providing better protection, a captive insurance company allows a business to be prepared to survive both supply chain disruption and a recession.Between shortages, inflation and supply chain disruption, the first half of 2022 has been far from a cake walk and the forecast recession will place further pressure on businesses. However, businesses—even small ones--have demonstrated resilience. According to the 2022 “
” survey by Truist, supply chain issues have prompted 48 percent of small business to seek new supply sources and 90 percent have taken action to address inflation.Overall, business are more positive about their financial future, with 67 percent feeling optimistic about their financial wellbeing. The survey shows the importance of being proactive, however. With the recession predicted to take place about six months down the road, now is the time to prepare.