Managing Your Own Economy

It’s the time of year when everyone is making a prediction on what 2023 will bring from an economic standpoint. With little effort you can find predictions for everything from a recession, soft landing, no recession and growth to some even predicting the economy and stock market booming again.

With all the ‘expert’ opinions out there how do you plan for the coming year? First off, it depends on your business. Many businesses obviously do well when the economy is strong. There also are businesses that do better during recessions. So, one-size-fits-all doesn’t work here.

How about looking at your business as a unique economy in itself and managing from there? When you think about it there are four basic phases in a business cycle. Here are the phases and the letter associated with them. I’ll use sales here as an example but you can put in whatever data is important to you such as gross margin, profitability, units sold etc.

Phase

A - Sales are below last year’s levels but are rising again.

B - Sales are above last year’s level and rising.

C - Sales are above last year’s level but slowing.

D - Sales are below last year’s level and still declining.

Here’s what this look like from a graphical standpoint.

There is a lot of management decisions that can be generated from these graphs. If you’re transitioning from Phase D, declining sales below year ago levels, to Phase A where sales are rising again, it might be time to start doing more advertising. Continuing in Phase A and approaching Phase B, adding more staff might be something to seriously consider. Phase C, means it might be time to weed out inferior products or services and spend time concentrating on cash and the balance sheet. Phase D brings decisions like reviewing all lease agreements, elimination of overtime and cutting back on advertising. There are multiple things in each phase to consider.

To figure out which phase you’re in I recommend using what’s called the Trailing Twelve-Month (TTM) method. For our example of sales, go back three years. In a spreadsheet start the first column with January 2019. In that box add up all sales for the previous twelve months. That will give you all your sales for 2018. In the next column, February of 2019, go back the past twelve months, add them together. Continue doing this until you’re up to your current month. When you graph those results, you will see the business cycles you’ve been through and where you currently sit.

If you want a little earlier look at which way your company may be going, add in a Trailing Three-Month graph on top of the trailing twelve. Since it’s only three months you’ll be able to spot changes in direction sooner.

One area where I’ve found TTMs to be very eye opening is charting profitability. The first time I did this was during my years at Silicon Logic Engineering. Looking at just the month-to-month numbers I felt like we were doing fine. Sales were going up and we were nicely profitable. However, when I charted our monthly profits in TTM format, it immediately showed a slow decline in profitability over the past couple of years. Our costs in salaries, benefits, CAD tools etc. had been going up but I hadn’t adjusted our pricing to reflect that.

When looking at your business this way you really don’t pay as much attention to all the news about the economy. The economy you’re focused on most is your own. The country from a macro standpoint may be in recession but your TTMs are showing that you’re doing great or vice-versa. Manage your business based on how you’re doing and I think you’ll find you’ll have better long-term results.