Reaching Economic Stability in an Uncertain Economy

Economists are predicting a “soft landing” for the U.S. economy. In Q1 2024, 32% of CEOs said business conditions are better than six months ago and 36% expect they’ll continue to improve over the next six months.1 This is good news coming off previous recession predictions.

Political unrest is casting shadows on the global economy.

The Ukrainian-Russian war, conflict between Israel and Hamas, and tensions between China and Taiwan are disrupting the global supply chain. Around the world, consumers are seeing shortages or rising costs for everything from food to fuel.

U.S. businesses are particularly sensitive to these challenges as the country prepares for an election that could introduce even more political discord. Questions include whether the U.S. will continue to support the war efforts, as well what changes can be expected in fiscal spending and the tax structure.

Despite global concerns, the U.S.’s outlook is improved. However, there is still some lingering economic uncertainty.

What are the current economic issues in the United States?

High inflation is perhaps the most critical economic issue in the U.S. In 2022, the U.S. inflation rate skyrocketed to 8% from an already aggressive 4.70% the previous year.2 In June 2022, it reached the year’s peak 9.1%.3 The country hadn’t witnessed such high inflation trends in 30 years.

Is inflation going down?

In March 2022, before reaching June’s peak, the Federal Reserve (Fed) stepped in and raised interest rates to slow inflation. Their efforts seem to be working. In January 2024, the inflation rate was 3.09%.4 However, the Fed’s ideal inflation rate is 2% and they are closely monitoring the economy to determine whether additional interest rate adjustments are merited.

How does inflation affect businesses?

For businesses, inflation means higher interest rates and higher capital costs. As with consumers, goods and services cost more and businesses may also have to pay higher wages. These rising expenses will affect decision making. For example, business leaders might have to decide whether they should wait to borrow funds to expand or whether a hiring freeze is necessary.

Running a company when there is economic uncertainty can prove demanding for even the most seasoned executive. Leading business consultants suggest asking three questions before deciding on a course of action when inflation is high:5

• How do inflationary cost pressures affect your industry and how will that impact your next moves? Not all industries are affected by inflation in the same way. So, it’s important to understand inflation trends relevant to the sector you’re in. For example, healthcare is less tied to energy and food prices than consumer goods manufacturing.


• Can your technology infrastructure capture and analyze data to improve your decision-making efficiency and agility? Using the right technology to run “what if?" scenarios and analyze data can inform decision making. Planning and performance tools can tackle pricing, sourcing and procurement, labor costs and compensation, supply chain disruptions, and consumer spending power, among other inputs.
  
  “It’s important to consider the big picture when it comes to technology infrastructure,” says Laura McGortey, payments product group manager at Synovus. In addition to organizational technology investments, consider other potential value-added services. For example, cash management services can help streamline accounts payable and accounts receivable processes. Such services will reduce payment and receivables cycle time, eliminate late fees on payables, and free resources to focus on other areas of the business.”


• How will you resolve inflation-driven issues with stakeholders?
  Whatever steps you take to address inflation should be discussed with stakeholders, not only to gain insight but also to avoid surprises. For example, talking with vendors may reveal alternative materials or services. Customers deserve updates on price adjustments, and employees need a heads-up about year-end bonuses, wage increases, and hiring freezes.

Once you've considered these foundational questions, you can then focus on concrete steps to manage inflation.

Develop strategies to combat inflation.

Of course, there's only so much U.S.-based companies can do to address global inflation. However, there are short- and long-term ways to counter inflationary impact closer to home.

1. Actively manage pricing.

   In 2024, 51% of CEOs said they would raise prices at least five percent to offset inflation.6 This may seem like a good idea since companies that actively manage pricing are usually more profitable.7 However, there are serious implications for raising prices that should be considered.
   
   The most common method is to implement a blanket rate increase for all goods and services. But this can be tricky if you sell a commoditized product, customers are price sensitive, or competition is stiff. You should ask yourself if you can afford to gain income but lose market share in the long term.
   
   Short-term pricing strategies are worth considering. These might include product bundling, installment payment plans, or even dynamic pricing that automatically adjusts to either demand (think Uber or airline travel) or to core cost inputs as they fluctuate. In addition, consider adding contract language to cover inflation-triggered price hikes. In an environment where costs are rising companies with fixed cost contracts can have margins quickly erode and may need to consider other methods such as cost-plus or guaranteed maximum price contracts.
   
   What are your competitors doing? If they're increasing prices, you have an opportunity to either join them or target their customers with lower pricing. But you’ll need to understand how either decision will affect your cash flow.

2. Prioritize products and services.

   Some companies rely on loss leader strategies to drive pricing higher on more desirable items. But this is an assumption that should be tested. The first step is to analyze profit margins on every product and service. Then develop sales strategies that will move products and services with the highest revenue potential.
   
   Stratus Cargo Canopies Owner J. Craig Jaschke said, “It requires keeping up with the myriad niches evolved in the last three years, while also being able to fulfill the customer’s wants. If the ‘go-to’ brand isn’t readily available, consumers will now keep looking for alternatives rather than wait. It could be an opportunity to gain new market share and value by delivering service that competitors can’t.”8
   
   For example, if customers are eager for quick delivery, suggest a product or service with a higher profit margin that’s ready to ship or be delivered. Segment customer and prospect lists to focus on those who are interested in higher-margin offerings.

3. Harness the power of technology.

   Even business leaders with no prior experience managing during inflationary periods can succeed with the right tools.
   
   Do you use forecasting and scenario planning to set goals? These exercises provide valuable insights for weighing risks, assessing possible outcomes and setting effective strategies. Digging into analytical data can also help to identify patterns or spot trends that indicate opportunities for growth.

4. Improve supply chain resilience.

   Two wars (one extending to the Suez Canal), an ongoing trade dispute with China and a drought in the Panama Canal continue to upend the global supply chain. If you are relying on too few vendors, are over- or under-inventoried or experiencing ongoing delivery slowdowns, it may be time to reconfigure your supply chain strategy.
   
   Consider these possibilities: What if the price of raw materials increases by 50% or labor costs by 20%? If you experience a supply chain delay of three weeks, how will that affect production? How would you respond if a competitor’s product is unavailable for several months?
   
   Revisiting your inventory, production, staffing, and pricing can help you create and implement appropriate responses for these possibilities.
   
   Tim Dewald, supply chain director at Hercules Poly Inc., integrated systems for a more comprehensive approach to managing supply chains. “We purchased an enhanced enterprise resource planning and transportation management system and tied them into a customer relationship management system. Scaling in this way enabled our newest division to grow 70% over the next 12 months.”9

5. Implement stress testing.

   Is your business in a solid position to weather an economic downturn? There are ways to find out. An experienced financial partner can help you tailor cash flow and revenue projections to the dynamics of your market for best- to worst-case scenario responses.
   
   Synovus Market Executive Kevin Gillen believes cash flow projection with stress testing is a critical process that can help businesses identify and address key weaknesses before a recession takes hold. There are some common missteps to be aware of, however.
   
   “Cash flow projections and analysis that include stress testing scenarios is key,” says Gillen. “Many businesses think stress testing is revenue-based only. But stress testing should account for both fixed and variable expenses to accurately model business performance under duress. Additionally, cash flow projections should be updated monthly and compared against budget.”
   
   Stress testing enables businesses to assess how they’ll respond in fluctuating market conditions.

6. Increase operational efficiencies.

   Over the last several years, many businesses became much more proficient at managing through ambiguity. Continue to look for more ways to reduce costs and boost efficiency.
   
   During earlier high-inflation periods, companies that executed thoughtful cost-cutting measures, while maintaining profitability, generated higher shareholder returns. Among the most effective approaches were:
   • Maximizing warehouse design for quicker access to inventory.
   • Eliminating redundant workflows or staff.
   • Cutting underperforming projects and initiatives.
   • Consolidating real estate holdings.
   • Controlling payment timing.
   
   Cost-cutting, however, is only one way to make improvements. Cash flow management is a tremendous opportunity to gain efficiencies that directly impact the balance sheet. “There are many options to streamline payables processing and reconciliation,” says McGortey. “For example, you could consolidate all payees into one workflow. Other unique solutions include ‘payee choice’ and ‘hands-free’ services that eliminate check printing and mailing, as well as the need to manage positive pay exceptions.”

7. Focus on growth.

   Progressive business leaders aren’t waiting for the economy to get better. Instead, they’re examining their circumstances with fresh eyes and identifying prospects for advancement.
   
   Both CFOs (62%) and CEOs (45%) are prioritizing their organizations' economic growth initiatives in the coming year despite the challenges of the current environment.10
   
   Achieving growth may require casting a wider net. Could expansion into new markets spur growth? Have you explored possible mergers or acquisitions? Perhaps your research and development team can explore alternative products and services. These options may be worthy of discussion with your executive team and trusted advisors.

No one can predict the future with 100% accuracy. However, it’s possible to examine and prepare for risks and opportunities ahead.

As a trusted advisor to successful businesses in a variety of industries, Synovus has the assets and insight to help you achieve economic stability. Contact a Synovus Commercial Banker for more details or stop by one of our local branches.