Risk Management

Midsize firms must be proactive to address an uncertain economy

Surveys show midsize firms concerned with inflation, interest rates, possible recession.
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· 5 min read

Although the economy seems to be doing well, many midsize firms say they worry about what’s in store in the coming months.

After midsize companies reported record revenue growth last year, they expect growth to decelerate amid challenges including inflation, a possible recession and talent shortages, according to a recent survey from Chubb and the National Center for the Middle Market.

While general consensus seems to have shifted to an economic soft landing over a full-blown recession, middle-market companies must remain vigilant, Arnold Macalintal, partner at accounting and advisory firm Wiss, told CFO Brew. He advised that firms come up with best-case and worst-case scenarios so they are able to quickly react to sudden economic shifts.

“Now it’s a matter of just remaining proactive…doing good budgeting, good forecasting, and looking into the future, but at the same time being nimble,” he said. “You’re going to plan for that future, you’re going to plan in the next few months, but something could happen very quickly that changes things.”

Here’s what experts had to say about managing risks, proactive financial planning, and pivoting quickly in an uncertain economy.

Caution. Like many organizations, California Bank and Trust is monitoring inflation and interest rates, in particular keeping an eye on how new developments with those key economic indicators may change client demand for lending, Chikako Tyler, CFO of the regional bank, told CFO Brew.

“We’re going to have the same challenges as any other business, but it’s unique in the sense that we’re on the receiving end of those investment decisions from businesses,” she said. “They’re hesitating. They’re not making big investment decisions today because they’re all being cautious about where this economy [is] going.”

Price fatigue. It’s no surprise that midsize businesses are worried about inflation and high interest rates, as heightened costs can wreak havoc on a budget. A typical way for organizations to absorb costs is to pass them onto consumers through higher product pricing. The problem is consumers aren’t as accepting of price hikes as they were previously, Macalintal said. Indeed, major food brands have noticed a pullback in spending in response to higher prices, NBC News recently reported.

“So you can’t take that route any longer,” Macalintal said. “Now it’s a matter of…it’s not your purchases, and it’s not your sales. There’s only one area you can get into now, to the OPEX [operating expenses].”

That means finance departments will need to get more efficient in their operations or even make some cuts, he said. One area where companies won’t be able to save money is in personnel and salary expenses. Organizations are competing for a limited pool of skilled labor, “so that is not really an area you can attack” through cost-saving measures, Macalintal noted.

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That leaves areas like marketing, trade show attendance, and travel expenses. Companies have to ask if the benefits are enough to outweigh the costs.

“Is the ROI there on some of these other costs? And if it’s not there, well, then maybe that’s where you can pull away from,” he said. “So it comes down to being a little more diligent in where the costs are being spent and what you are actually getting back from those costs at the end of the day.”

Lessons learned. However, some things are out of an organization’s control. A rash of regional bank failures unfolded last year. It started with Silicon Valley Bank, and moved onto other regional banks, including Signature Bank of New York and First Republic Bank in California. More recently, New York Community Bancorp, which bought the failed Signature Bank, is having its own troubles.

While it appears the worst of the crisis has passed, “there’s this larger and complex issue in terms of how banking [is] structured in the United States,” Tyler said.

While it’s true that these banks had specific issues that contributed to their failure, such as SVB’s concentration in tech startups and Signature Bank’s ill-timed dealings with cryptocurrency, Tyler said the failures provided lessons for other banks.

“It’s really made us think about the fact that a couple tweaks, a couple of wrong moves can move money in an instant,” she said. “So, you really need to have a very thoughtful and diversified plan, and know your customers, [and] be in touch with your customers all the time, so they know you and you know them.”

One way the bank is diversifying is by expanding its client base. As its business customers have grown in size, the bank is focused on bringing in more small firms as clients, Tyler said.

“We also need to continue to refocus on that smaller granular deposit stack, because that’s a hugely important component in terms of diversification and where people need banking services,” she said.

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CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.