Deloitte partner warns companies to prepare for possible trouble
Deloitte is seeing signs of trouble ahead for companies, despite the strong economy in the U.S. right now.
In a recent CFO Signals report, a group of financial executives from both public and private companies polled in the fourth quarter of last year expressed doubts about future global economic growth, amid worries about geopolitics, U.S. political turmoil and trade policy. The proportion of CFOs expecting the North American economy to be better in a year declined to just 28 percent.
Mark Davis, national managing partner of Deloitte Private Enterprises for Deloitte & Touche, is seeing some headwinds coming up, even though the U.S. economy added a record number of jobs last month and the Federal Reserve is taking a more cautious approach to raising interest rates this year.
“If you were to look out over the next 12 to 24 months, there are predictions we might have a slowdown or a recession,” said Davis. “There’s no question that private companies are doing extremely well. If you look at the NFIB Small Business Optimism Index, there’s great optimism as it relates to the strength of the private company market. Deloitte recently did a CFO Signals report, and 55 percent of the CFOs polled thought there was the potential for a recession by the end of 2020. I’m not predicting what’s going to happen. The key for private companies is to prepare for what might occur in the future.”
To prepare for a potential economic downturn, Davis suggests private companies consider renegotiating any loans with a 12- to 24-month expiration window. He also believes they should identify any cost savings opportunities based on risks and opportunities, as well as assess the revenue recognition and lease accounting standards.
“If we look at lease accounting and revenue recognition, these are areas that take time for companies to deal with,” said Davis. “With rev rec and lease accounting, private companies have a little extra time. Get them out of the way before any slowdown occurs.”
He believes companies should improve the quality controls in their operations and accounting. “Now is the time to invest in people, processes and systems,” said Davis. “From a people perspective, the most important thing to do is stay close to your key employees. You don’t want them to be nervous. Share information with employees.”
To retain talented employees, he believes companies should consider offering them “stay bonuses” that vest over a two-, three- or four-year period.
He also recommends investing in new technology to speed up processes like billing. “Take a look at areas in your business that take longer than you think they should,” said Davis. “Get your sales invoices out more timely. Look at the areas that could be improved. If your accounting or ERP systems are old, now is the time to evaluate a new system. Most companies would avoid spending those dollars, but the systems could be seven to 10 years old.”
Companies also need to cope with the complexities of the recent tax overhaul. “We’ve been dealing with our clients for a year on this,” said Davis. “Companies that had a complex structure of global operations have spent the most time looking at the new regulations because they do have more of an impact if you have an international organization. Most of our clients have spent time looking at this, and we would recommend anybody do that now.”
Still, he thinks companies are in a good position right now. “To us, this is a very exciting time to be running a private company,” said Davis. “There are so many opportunities for companies, but be prepared for anything.”