PERSPECTIVES

From The Co-Founders

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Tips, Tactics & Strategic Insights and Commentary
from The ROI Co-Founders, Pat Johnson and Dick Outcalt
Outcalt & Johnson: Retail Strategists LLC; Retail Turnaround Experts

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Recession? No Thanks, Not For Me!

Try as we might, it seems that there will be no avoiding a recession in 2023. How deep it is, and how prolonged, still remains to be seen. 

For retailers, it's not a matter of whether your business will be impacted, just how much. Alas, retail does not lend itself to being recession proof.

However, there are ways to make your business more recession resistant.

The place to start? First, find out what your Debt-to-Worth ratio is right now. That is the #1 measure of the financial strength of your business. It's a key indicator of your ability to weather an economic downturn. 

  • It's easy to calculate. Look on your most recent Balance Sheet. Find the Total Liabilities (short-term plus long-term) – accounts payable to the vendors; other accounts payable; any notes payable; credit card balances; long term loans; etc – and divide that Total Liabilities amount by the Net Worth, or Equity, of the business. 
     
  • The lower the Debt-to-Worth ratio, the financially stronger your business. The "debt" is what is owed to others (just like the mortgage on your house); the "worth" or equity is your ownership of the business. 
     
  • As an example, if your Debt-to-Worth ratio now is 5 to 1, it means that your total debt is 5 times the equity in your business. With a recession looming, consider getting that Debt-to-Worth ratio to 4 to 1, or 3 to 1, or even 2 to 1, and you will be more recession resistant.

So, with this as your starting point, your goal is to get your Debt-to-Worth ratio lower. How to do that? 


Well, it won't be easy. But here are some ways to start.
(By the way, prepare your mindset: you likely will be incurring losses. Since the only way to pay amounts owed is with cash, you must choose cash over profits.)

  • Convert more assets into cash – whether through clearance sales, cutting departments, closing stores – and use that to pay down debt. 
  • Cut back on money going out, and apply those funds to expenses already incurred.
  • Reduce inventory purchases: fewer vendors; fewer lines; more special orders; etc. 
  • Reduce expenses: involve your staff in these decisions; they will have practical ideas of costs that can be reduced. 

And every month, recalculate your Debt-to-Worth ratio. This is a very important step! You must monitor your progress. Is the Debt-to-Worth ratio going down?!

As you reduce debt, your Debt-to-Worth ratio will be improving – that is, it is getting to be a lower and lower number. And that means the survivability of your business is increasing during what may be a downward economic cycle.


And once the recession subsides, your business will be well-positioned to seize the opportunities of a better economic climate. 
 

Related Articles

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    Guess what? May be time to guess again!

    After months of doom-and-gloom headlines and hand-wringing about a recession in 2023, headlines last week (quietly) said this: "What Recession? Some Economists See Chances of a Growth Rebound." One economist, in fact, seemed a little chagrined to note "So far, the U.S. economy has proved unexpectedly resilient." *

    • While economists, famed for not agreeing, still find other causes of concern and worry, this may mean that topics other than the economy can take over the "bad news makes news" coverage.
    • And that, in turn, could buoy consumer confidence, and retail sales. 

    Retailers must be mindful of all this as they make their business and buying decisions throughout the year. But the macro economy is simply interesting, but not significant. Your local economy is, of course, what really matters. 

    In that context, every savvy owner uses these three steps.

  • COVID-19 thumbs/InvTurns.001.png

    Getting in Shape for Musical Chairs?

    The playing field has shifted dramatically under the feet of retailers. 

    Merchandise orders placed months ago are now proving to be "too much stuff that consumers no longer want so much of,"  as was reported rather colloquially just 3 days ago.  All this was summed up this way: "Retailers with slower inventory turns might find current conditions especially difficult to navigate." *

    Now, look at the chart at the top of the page. Without being dramatic, it may be a lifesaver for your business this year. 

  • COVID-19 thumbs/CouldShouldWill2.001.png

    Is Being First Smart?

    A few years ago, during a planning session in our office, we drew a quick diagram on a whiteboard. It showed three shapes. 

    • The large rectangle at the top was labeled "What we COULD do" Lots of good ideas deserved a place in this box!
    • The much smaller rectangle below it was labeled "What  we SHOULD do" Ahh yes, those pesky obligations. 
    • And finally, at the bottom, was a tiny little square: "What we WILL do!" 

    Out of all of the potential things we could do, which ones truly warrant our time, energy, and resources?

    That picture keeps coming to mind as the COVID-19 shutdown orders on retailers of "non-essential" goods are starting to be lifted. 

  • grfx-Lib4Owners/customers2.png

    Is 2020 Getting You Down?

    Is 2020 continuing to wear you down? No surprise. And no shame in that!

    Retailers are among the most optimistic folks we know. But the relentlessness of the disruptions and in some cases tragedies of the three pandemics – the virus, the economic meltdown, and the civil unrest – followed by the wildfires in the West and the hurricanes in the Southeast, now compounded by the uncertainties of national election. Oh, and then there's the impending flu season. And... And...

    It IS a lot. And it feels as if there is no relief in sight. But maybe there is. 
     

  • Canary In the Coal Mines was...the Millennials?!

    Many times during 2020 we spoke of "disruption with a capital D!"

    And now, more than a third of the way through 2021, that Disruption with a capital D shows no signs of abating. Instead, it just keeps morphing (not unlike the Covid strains that keep emerging....) 

    But the disruption that we see emerging is in the attitude,  deportment, and psyche of Millennials, and the many people who are now acting like Millennials. This is showing up in the attitude of shoppers as well as employees. 
     



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