Armanino LLP, a Top 20 Firm based in San Ramon, California, has been hearing concerns from business clients about a possible recession, asking how they can reduce costs, but during the era of the so-called Great Resignation, it's counseling them against laying off desperately needed employees.
"For good reason you should be loath to look there first," said CEO Matt Armanino. "This is obviously a relevant topic with so many of our clients right now. When you look at the macroeconomic indicators right now, it looks very troubling for sure. The broader economy looks like it's poised for decline. That raises a lot of concern for clients, but what we try to do is get clients to focus on key metrics that are unique and internal to their own organization because different companies are in a different place relative to where the economy is today."
The firm tries to help clients on an individual basis depending on their particular situation. "The broad conversations are really hard," said Ryan Prindiville, Armanino's partner-in-charge of consulting. "We have to look client by client, industry by industry and segment by segment based on the growth stage of their business to develop a specific plan, and it won't be the same for every client. There is no one size fits all plan in a world of confounding factors."
Armanino has guided clients ranging from Fortune 500 companies to small businesses through decades of business cycles and helped nearly 140 "unicorn" companies since it was founded in 1969.
"Clients should think about it as a series of gates that they go through in analyzing what path forward might make the most sense," said Armanino. "The first gate we suggest they go through is a thoughtful approach to how they are preserving cash. Back to internal metrics that matter, free cash flow. Are cash holdings growing or shrinking? Many of our clients during a cycle like this are focused on projects like doing a 13-week rolling cash forecast. That was a thing everybody focused on in 2020, when COVID first happened. That's a key metric for sure, and it's something that outside investors will often draw a lot of attention to: What is the cash burn and can they slow it down?"
Businesses have different ways to put together such a forecast. "A simple example would be clients today that have contract terms in terms of their payables that are net 30 or net 60, but they consistently pay their bills as soon as they arrive," said Armanino. "They could comply with the contract terms and slow down payment for 30 days, for example, and preserve cash flow, so they continue to meet the payment terms in their contracts but just manage cash flow a little more conservatively."
The firm discusses other key metrics as well, such as revenue per employee, and whether it's going up or down, and what's happening with cost per employee. Another key indicator is pipeline growth and whether it too is going up or down.
"That's a huge indicator of future revenue direction," said Armanino. "It's a leading-edge indicator of how the larger concerns in the economy might be affecting different clients' businesses."
Average days to close new business are another metric for clients to watch, along with conversion rates for the pipeline of new business. They should also examine what's happening with accounts receivable.
"If our clients' customers are taking longer to pay them, why is that? That's certainly concerning and in many cases slow pay is a precursor to no pay." said Armanino. "These types of internal metrics don't always have that much to do with the broader economic environment that is making headlines in newspapers right now. We try to make it more specific to our clients' actual business. But gate number one is paying close attention to these internal metrics and in particular a thoughtful preservation of cash in preparation for a potential slowdown in the broader economy."
Managing expenses
The second "gate" is suggesting clients pay close attention to how they are prioritizing their expenses, and perhaps reassess their nonessential operating expenses.
"We have many clients who are paying for unused or little used subscription services," said Armanino. "Are they paying for software licenses that are not being used internally or are duplicative of multiple programs they have employed internally? Can they save? Our suggestions are to do a review of your vendor spend. Where are you spending money and are there items that can be cut without any negative consequences to the business?"
Similarly, clients should look into reducing their real estate footprint and leases, especially these days when so many employees work from home. Still, there may be limitations in how fast they can get out of those leases.
"In many cases our clients are constrained in how fast they can do that in relation to real estate lease obligations, but it might be they can sublet space, or if they have space they are leasing that is coming up for renewal, actively look to shrink their footprint," Armanino suggested. "Many of our clients are continuing to have their workforce work in a more flexible way — work from home — so they might not need as much space."
In an inflationary environment like the current one, clients may need to raise their own prices just to stay in business.
"Instead of slash and burn as a reaction to concern in the economy, what are the opportunities to actually raise their own prices in an inflationary period?" said Armanino. "Are they positioned to do that well? At the end of the day I think a pragmatic approach to expense management is important."
The firm is advising business leaders about the difficult priorities facing them in the current economy. "CEOs that we talk to every day in our business — whether we're talking to them as consultants or working with them on their top priorities for their CFO, or working with them to look at their technology stack, or we're doing strategies and operations consulting with them — the challenge facing CFOs these days is that all of those factors are more confounding than they ever have been," said Prindiville. "The normal inputs that a CFO would use to make a decision are more confounding than they've ever been."
Clients need advice, for example, on the recently enacted Inflation Reduction Act, which included a number of tax-related provisions such as tax credits for renewable energy, a minimum 15% tax rate for billion-dollar corporations, and an excise tax on corporate share buybacks.
"Our tax team is looking at it and saying what are the tax implications and how does that benefit businesses?" said Prindiville. "What are the scenarios that can apply and how do they apply? It will take several weeks to shake out and maybe longer because of the complexity of it. We're evaluating what the options are for our clients."
Digital transformation
Clients have other concerns about the economy as well. "If they were already in the middle of some sort of transition — whether they're out in the market working with capital raising or something like that — what factors do they need to consider right now and how fast is that changing," said Prindiville. "We had a pretty frothy PE market coming into the last couple of months, but is that going to stay? With all the news we're seeing in the last couple of weeks, what's the effect on access to capital? A lot of clients are asking that question. Given the complexity and difficulty in recruiting and retention right now, and the fact that businesses are looking to save or reduce costs or prepare for scenarios coming up, whether it be rising costs and complexity with people retention, the second one that has come to the fore is automation. How can they automate and simplify their processes, the things they would normally be recruiting a workforce for, or retaining an existing workforce, in the face of the change that's going on in the world?"
Armanino recommends against reducing marketing expenses for generating sales. "If travel and T&E are important to supporting and generating sales and revenue-generating activities, that's probably not where they should be cutting," he said. "That kind of cutting can put them into a death spiral and make matters worse, but in many cases there are opportunities to cut expenses without any negative impact to the business."
Instead they should look for ways to improve efficiencies in the business while reducing costs over time through digital transformation of their technology.
"Many of our clients have been engaged in projects to leverage technology, to transform their businesses in ways that drive productivity gains, but they have concerns in the broader economy that might cut or slow down these types of projects," said Armanino. "But I think that might be in many cases a significant mistake, delaying or ignoring opportunities to continue to deploy technology as a way to deliver short-term ROI."
Instead of cutting their workforce, clients can leverage technology to perform routine tasks such as emailing prospective customers, finding job candidates, administering employee benefits, managing service obligations and relationships, or deploying a chatbot for customer support.
"Four out of 10 companies have been deploying artificial intelligence to drive digital transformation," said Armanino. "There's been a massive level of investment, $325 billion in the last year. Rather than saying let's cut this off, we still think there are targeted ways to accelerate digital transformation that will serve as labor augmentation or replacement strategies before you have to necessarily start slashing jobs."
Last resort
He believes workforce reduction should be the option of last resort right now. "The reason for that is we've been dealing with the Great Resignation," said Armanino. "More than 40 million Americans have quit their job in the last year alone. That's a record. That's never happened before, so suggesting a workforce reduction as a primary way to manage concerns about a recession in many cases is penny wise and pound foolish. If this recession doesn't last as long as people expect, which people think is likely, clients can expect their workforce costs to increase more in the future and cutting employees now only to have to turn around and rehire them or retrain new folks is a very expensive strategy in the long run."
"We have inflation at historic levels, maybe evening out a little bit, but we also have the lowest unemployment at historical levels," said Prindiville. "We have rising wage expectations. We have scenarios where the employees actually have choices, and there are a lot of options for them, so retaining employees is actually a big challenge for CEOs and leaders."
Companies can even take advantage of the current economic environment to find ways to improve their technology. "There's not a single one of our clients that is not in some respects becoming a tech company so I think this is a great opportunity," said Armanino. "Recessions and slowdowns can be a good time to look at new ways to digitize the business and accelerate that transformation that is critical to their future success."
