By Phil Powell, Associate Dean of Academic Programs at the IU Kelly School of Business
Faculty and staff from the Kelley School of Business at IUPUI and Bloomington have joined with other community partners to support the Indy Chamber’s Rapid Response Hub initiative, which is working to help small businesses in the Indianapolis region survive COVID-19 and thrive afterward. This article updates economic and business insights originally provided in a March 16 posting.
Enterprise owners must make well-informed decisions based upon reliable data and best practices in management and finance. Bad decisions lead to unnecessary bankruptcy or loss of business. The Kelley School aims to provide service and expertise to ensure the strongest business outcomes for greater Indianapolis and the state of Indiana.
Regarding the economy …
This is the worse economic contraction since the Great Depression. The April 23 jobless claims report implies a current unemployment rate of approximately 14%. With a labor force of about one million, this implies current job loss for 140,000 residents in the Indianapolis metropolitan area. Unemployment in the U.S. during the Great Depression hit its highest point of 24.7% in 1933. According to Bureau of Labor Statistics data, the worst unemployment peaks since then have been 10.8% in November 1982 and 10.0% in October 2009.
The federal government’s $2 trillion stimulus will quickly cushion impact. Hoosiers began to receive stimulus checks last week. These plus unemployment payments, small business loans and other forms of assistance will fuel new spending that restores as much as $4 trillion in U.S. economic activity. Total U.S. economic activity was $21.7 trillion with 3.5% unemployment in the fourth quarter of 2019. Unemployment of 14% implies an approximate fall in U.S. economic activity of 21% or $4.6 trillion. Over time, therefore, the stimulus is expected to close a significant portion of the economic gap generated by COVID-19.
The economic recovery will be quicker than after the 2008 financial crisis. Misalignment in financial markets sparked the recession that followed the 2008 financial crisis. In contrast, a public health crisis sparked the current recession. A recently strong economy will enable a speedy bounce in market activity after stay-at-home orders are lifted. At a recent Indianapolis Roundtable Economic Update meeting, the Federal Reserve Bank of Chicago predicted 2020 U.S. economic growth of -4% in the first quarter, -25% in the second quarter, +7% in the third quarter and +8% in the fourth quarter. Goldman Sachs has predicted more dramatic movement with an expectation of -9% in the first quarter, -34% in the second quarter and +19% in the third quarter. A rise in the S&P 500 stock index of 27% since its low on March 23 signals expectations from markets of a robust rebound.
Planning must assume an autumn peak in COVID-19 cases that is manageable. Center for Disease Control Director Robert Redfield has warned that an autumn spike in cases could rival the current spike. The future is uncertain. Business owners, though, should plan for a trajectory without reinstatement of stay-at-home orders. Such an approach maximizes the chance of business recovery. Contingency for another shutdown should be maintained. Maintenance of higher cash reserves and honesty with employees, suppliers and customers about the possibility of additional pandemic-induced closures are best management practices in the face of such uncertainty.
Plan for general economic recovery in three stages – full economic paralysis through June, slow “stop and start” return to business between July and September and recovery between October and March. The University of Washington Institute for Health Metrics and Evaluation currently recommends that Indiana begin an ease of social distancing restrictions on May 21. The federal government’s Guidelines for Opening Up America Again offer a three-phase plan for states to re-establish commerce. Business owners should understand where their industry is sequenced in any public plan and monitor the reopening experience of Europe and South Korea to anticipate reversal of government easing.
Regarding what businesses should do …
With this as the best forecast of a trajectory toward recovery, Indianapolis business owners can do the following to ensure enterprise survival and prepare for success when business returns.
Aggressively renegotiate cash obligations for the next twelve months. Extend and deepen credit lines to enable larger cash reserves. Access to cash is the antidote for bankruptcy. Creditors and leasing agents have as much interest in their client’s survival as the owner does. Smaller payments now in exchange for higher payments later is smart financial practice when payers face temporary business downturns outside of their control.
Keep core employees close (even if they had to file for unemployment), and promise and pay a “come back” bonus when business returns. Quick return of experienced employees maximizes revenue earned when the rebound begins. The cost of a “come back” bonus is less than the cost of losing employees and delaying service to customers.
Reach out to customers, sincerely ask how they are doing and offer a “come back” discount once commerce can resume. The benefit of higher certainty now is worth the sacrifice of reduced revenue later from lower prices. Conditional orders for future delivery enable better production planning and offer leverage in re-negotiation of short-term payment obligations with creditors and leasing agents.
Use down time to clear mental, emotional and physical clutter within the organization to increase productivity and competitiveness. Clean storage areas, liquidate useless inventory, address misunderstandings, mend unresolved conflicts and set clear business goals to achieve once recovery begins. Complete tasks that were never addressed when everyone was busy before COVID-19. These activities build confidence, strengthen culture and lift organizational performance.
Hold regularly scheduled meetings with all team members to discuss, debate and brainstorm ways to improve processes and products. Business must reinvent and re-imagine itself to adapt to post-COVID-19 realities. Innovation through collective dialogue in an enterprise strengthens work satisfaction and a sense of ownership among employees. This elevates organizational resilience and a capacity to function well in an environment with more uncertainty.
In summary, Indianapolis business owners should “buy time and ready up”. Renegotiating payment terms and expanding credit lines “buys time” for cash to keep the enterprise alive. Keeping staff close, clearing organizational clutter and improving processes “readies up” the business for an upcoming return of customers.