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Surviving an economic downturn

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The Great Recession gave accountants lessons on preparing for future dips, says Andrew Kenney in the Journal of Accountancy.

Fear was in the air in 2008.

South Florida was known for its bounce-back economy, but the downturn was palpable to Tony Argiz. “Everywhere that I went, it was just horrible,” said Argiz, the chairman and CEO of Morrison, Brown, Argiz & Farra LLC.

The firm was in a relatively strong business position after years of growth, but employees were worried and clients were suffering as home foreclosures went up, financial institutions failed, and the effects rippled through the economy. In the newly developed parts of downtown West Palm Beach, it felt like a ghost town. Argiz knew that the company’s biggest challenge would be to maintain employees’ focus and morale.

He thought back to his early years as a child in South Florida, when the Catholic church provided him with the community and education he needed while separated from his parents. Argiz came from Cuba to the United States during Operation Peter Pan, a mass exodus of more than 14,000 unaccompanied minors during the early 1960s.

“After that experience, I was able to console people and make them feel better,” he recalled. It was a formative experience — and it prepared him to lead his company through the country’s worst economic crisis in decades. “It allowed me to stay disciplined. It taught me how to always value the team around me,” he said.

The downturn, in the end, was a hiccup in an incredible growth spurt: Under Argiz’s leadership from 1997 to today, MBAF has grown from $7 million in revenue to more than $130 million, he said.

His insights on business and life — along with those shared by other CPAs in recent interviews — can help any firm prepare for the next big dip.

And it’s a message that some companies may need to hear. Just less than half of CFOs have plans for a downturn, and about 39% have taken concrete action, according to a first-quarter Deloitte survey of 158 CFOs in North America. Many of their “first defensive actions” were tactical, rather than strategic, in nature: Survey respondents talked about cutting discretionary spending, hiring, and headcount.

Concerns about a new downturn are running higher in 2019 than they were in 2018. While a majority of respondents to the AICPA’s quarterly economic outlook survey are still optimistic about the U.S. economy, only 35% were optimistic about the global economy.

Here is some advice from Argiz and other CPAs on how to survive, and even thrive, during tough economic times.

Talk to clients. In 2008, financial institutions, automotive dealerships, and international tax consulting made up a significant portion of MBAF’s business, and all those industries took a heavy hit during the downturn. But the company was sustained by its regular audits and other prescheduled work and strengthened by its lack of debt.

As a leader, Argiz reassured his team that they wouldn’t have to let people go and aligned them behind a common goal: Keep costs low and look forward so we can survive this together.

Then he carried that message outside the office, telling staff to prioritize face-to-face meetings with clients.

“Make sure that the clients, in these hard times, they know that we’re there,” he recalled. “Make sure that they feel, at least, that they can talk to someone that’s listening.”

Prepare for rainy days. Sandy Cockrell, CPA, leader of Deloitte’s global CFO program, advised that financial leaders maintain a broad base of knowledge and start planning for bigger strategic shifts.

“With this in mind, CFOs can ask: What internal risks pose the biggest threat to financial performance should the economy worsen?” he wrote in an email. “What external risks pose the biggest threat? How can we begin preparations without hampering existing operations?”

The Deloitte survey found that a variety of offensive and defensive strategies were being considered or employed. Besides reducing spending and hiring, leaders also were preparing to delay investments, alter pricing, reduce inventory, and renegotiate contracts.

But only a small portion of companies — about 25% — had an offensive or opportunistic plan for a downturn.

Be flexible. Greg Frazier, CPA/CITP, a sole proprietor based in Detroit, saw the effects of the financial crash clearly on the city’s streets, as the red-brick homes and tree-lined streets were changing to “empty lots and vacant houses,” he said.

Other firms were failing, but his own specialized skill set would carry him through. Frazier is the sole proprietor of a firm that specializes in cloud technology and custom software solutions.

“To use an analogy, the recession, I think it was a good punch in the chest for me. It wasn’t a fatal body blow. And it opened up opportunities,” he said.

For one thing, he played a direct role in securing a significant long-term contract for a major client — a company that replaces sunroofs and other parts for luxury automobiles and saw new opportunities in the downturn. When a major auto insurance carrier wanted to know whether the client could manage the greater business volume, Frazier set up a dinner and explained how he would enhance his client’s IT systems with a cloud-based application to handle the volume of work.

It worked: The client got the contract, and Frazier had capitalized on a niche. Eventually, new clients seeking customized, cloud-based software solutions steered his practice through the downturn.

“Be willing to take risks to look into other endeavors,” he said. “Be perceptive enough to see when an opportunity, sometimes disguised as a change or crisis, is coming.”

Know your numbers. Ann Vickers, CPA, CEO of Charles River CFO in the Boston area, said that the recession cut her company’s revenue expectations by about 80% over five years. The firm of 40 provides outsourced financial services for other companies, from basic tasks to the CFO level.

The downturn’s effects filtered through clients first, giving the company some time to prepare. First, following her usual practice, Vickers kept a close eye on payments leaving the company’s accounts.

“I use that as a way to keep my fingertips on the pulse of the organization, but also, from a planning perspective, to know what’s coming down the pike,” she said. “We’re always reviewing that, but when you’re getting ready for a recession, you’re doing that a little bit more.”

Be transparent. As the downturn grew darker, Vickers prepared for bigger changes. Most of the company’s staff are employed on a variable model, with wages based on hours worked for clients. So, company leadership communicated a clear message: The amount of billable work was dropping, but the company could sustain employees on a reduced schedule.

“They can plan for that, but more importantly, they can make a decision around that,” Vickers said. “If that’s not adequate or sufficient, then they have some time that they can go and land another position, if they had to, for the benefit of their family.”

The company’s flexibility allowed it to maintain profitability through the recession, while transparency kept the faith of employees and clients, Vickers said.

It’s hard to believe that another recession could hit the booming Boston-area economy, Vickers said. But she’ll never forget it’s possible.

The key, she said, is to build a flexible company structure, keep an eye on costs, “and make those difficult choices now to prepare for the next recession.”