Latest / The Life-First Solopreneur / 62. Survival Guide to Inflation and Recession for Solopreneurs
Transcript
- Joe Rando (00:00): The last thing you want to do during inflation is hide your money in a mattress. If inflation is running at 8%, that's like paying an 8% tax on your money every year. Historically, the people that have done well during inflation own things with intrinsic value, and this can range from anything from precious metals to real estate, to stocks and companies that have flexibility to raise prices like consumer goods. To me, the real goal during inflation is not to lose ground Intro (00:24): Bigger doesn't always mean better. Welcome to the One-Person Business Podcast where people who are flying solo in business, come for specific tips and advice to find success as a company of one. Here are your hosts, Joe Rando and Carly Ries. Joe Rando (00:43): Welcome to the One-Person Business podcast. I'm one of your hosts, Joe Rando. Okay. I have good news and I have bad news. The good news is that Carly is having a baby. The bad news is that she's now out on parental leave and you're all stuck with just me. But this is the last podcast of the season. So you're not stuck with me for long. We'll be back in the fall with season two of the One-Person Business podcast. Now don't think I'm off for the summer. Nope. I'll be putting out blogs as well as working on helping people to get up to speed on the LifeStarr app, which is being released in July. But for today, we're gonna try to find some good news in a bad economic outlook and I'm gonna give you my take on things you can do to survive the economy that seems to be coming at us now. Joe Rando (01:27): It's become much more uncertain as of late, and we all hate uncertainty. But the good news is that the uncertainty can create opportunity. Plus we can prepare for the bad stuff. So everyone is talking about inflation and recession. So today I'm gonna talk about inflation and recession. You may be asking "Gee Joe, I like your stuff on solo businesses, but who the heck are you to talk about the economy?" It's a good question. And the answer is that I've been around a while and that in and of itself qualifies me for a little more than an AARP membership and in about five years, social security for as long as it lasts. But I've seen a lot in those years. Much of it from the perspective of a solopreneur and a small business owner, plus I'm not trying to sell you anything. Joe Rando (02:10): And it stuns me how much BS is spewed about the economy still to this day. They say those who don't learn from history are doomed to repeat it, and believe me, I have some history I don't wanna repeat, . And I don't want you to be miserable either. So the thing to know is that there are silver linings to most negative things and inflation and recession are no exception. So a piece of good news is that in fact, economic downturns can create huge opportunities for those positioned correctly and possessing the right attitude. Inflation provides fewer business opportunities than recession, but there are some. I guess one thing is that rising interest rates will let you make actual money in your savings account. Okay. Let's look at the current state of the economy. And by current, I mean right now, which is June 16th, 2022 at 9:32 AM Eastern daylight time. Joe Rando (02:57): There's tons of talk about recession, but that's all it is right now, talk. The economy is weakening, but still strong. GDP (Gross Domestic Product) projected to grow for 2022 and unemployment rate is still below 4%. That is not a recession! On the other hand, inflation is here, no question about it. There are lots of reasons for it and I'm actually shocked it took this long to kick in. Western governments have been pumping money into the economy since 2008. And when you crank out more money, guess what, it becomes less valuable. This principle is universal. Scarcity creates value. When dollars are more abundant, they're less valuable and therefore they buy less. And this is the essence of inflation. But for the longest time, it didn't happen. Though I think it was like a balloon being blown up bigger and bigger. First by quantitative easing. That means money creation in federal reserve speak. That was done after the 2008 recession. Joe Rando (03:48): And that was followed then by the stimulus checks provided during the pandemic and all that money was just sitting there waiting for that pin that would pop it. The pin of course, was the double whammy of COVID based supply chain issues combined with the war in Ukraine. Yeah, Okay. That's not a pin. That's like a large spear aimed right at our inflation balloon. And it's not just ours. All of Europe and Canada are suffering the same. So we have inflation and we are expecting recession. But this is unusual. Okay. Most of the time inflation and recession are not seen together. In fact, it doesn't happen so often that they have a special name for it when they do happen together. And it's called stagflation. It last occurred in the US in the late 1970s and early 80s. And I gotta tell you, stagflation is lousy, but the new Republic claims it's not gonna happen again. Joe Rando (04:34): I put a link to that article in the show notes, not sure how right they are, but it's worth a read. So given that we have inflation, it's at least unlikely that we will have a recession too. You know, given that spear, I talked about a minute ago. I guess anything is possible, right? But inflation is here and that makes me less worried about recession happening at the same time. But we could also see inflation tamed by aggressive interest rate hikes immediately followed by recession due to yeah, you guessed it aggressive inflation rate hikes. Plus, another thing I've observed over the years is that whenever the masses agree on something about the economy, it almost never happens. In 2008 not many people saw the crash coming. The ones that did made a lot of money, but so did the ones who had money to invest and the guts to believe that the stock market would recover. In the early 1990s, the Wall Street Journal had a headline to the effect of, "Is real estate dead as an investment." Joe Rando (05:28): The real estate market was so beat up that most people gave up on it. Guess who made a lot of money? So with everyone expecting a recession, it makes me less worried about one, at least in concert with inflation. Now that said there will be a recession. We just don't know when. There's an old saying that economists have predicted 11 out of the last 5 recessions. This is very funny. It's also basically true. So, the idea here is be ready, but don't be certain when. All right, so let's talk first about inflation and let's first look at the good news. Inflation is painful. When you shop at the store, you can see those prices going up and that's no fun. But, it's a great opportunity to raise your prices. People are so used to things becoming more expensive right now that they won't blink at a price increase, especially if it's not egregious. Joe Rando (06:22): Once you raise your prices, you're basically locking in at this new higher level. And this is a good opportunity for the long haul. The bad news of course, is that everything you buy for your business is also becoming more expensive. So you at least wanna raise prices enough to maintain your margin. And I mean that on a percentage basis. Cuz this will allow you to roughly maintain your lifestyle. Since everything you buy to live is also more expensive. There's also some good news about interest rates. So, fighting inflation involves raising interest rates. This is good for fixed money instruments, right? So the days of the 0.1% money market may be behind us. So now you can park your cash someplace that produces decent interest. Higher interest rates also mean that the stock values will typically drop because those money market rates become a more attractive place to put money. Joe Rando (07:05): And so demand for stocks weakens. But since the interest rates used to fight, inflation are typically higher than the rates after inflation is tamed, this can create a buying opportunity for stocks. On the other side, the bad news is that the cost of borrowing money also increases. Additionally, the buying power of your dollar is being eroded by inflation. So over time, a dollar buys less and less. So what should we do? The last thing you want to do during inflation is hide your money in a mattress. If inflation is running at 8%, that's like paying an 8% tax on your money every year. Historically the people that have done well during inflation own things with intrinsic value, and this can range to anything from precious metals to real estate, to stocks in companies that have flexibility to raise prices like consumer goods. To me, the real goal during inflation is not to lose ground. Joe Rando (07:52): You should really talk to a financial advisor and if you don't have one, I provided a link to two that focus on solopreneurs in the show notes. Let's talk a little bit about recession. Recessions are ugly, but in my opinion, provide more opportunities than inflation to make your business better. And let's talk about those opportunities. One upside of recession is the ability to cut deals with other people that they would never consider doing in a good economy. And this could be anything from buying an asset to making a long term contract at a great price. One thing to keep in mind is cutting really aggressive long-term deals with tiny companies may not work out. They may not be able to sustain an agreement made in desperation and eventually they'll stop performing. Since this is unpredictable, it can be a problem. But cutting an aggressive deal with a larger company can work out well. Joe Rando (08:39): So don't be shy when you're a buyer in a recession, ask for the deal. I told a story in a recent One-Person Business podcast that was during a major recession that drastically hurt the real estate market that I tied up a valuable piece of land for short, short dollars. It took a while, but that deal resulted in me developing a 450,000 square foot shopping center with Home Depot, Target, Kohls and more so there are opportunities during recessions. Another thing about recessions is that they cull weaker businesses. When they're over, the survivors gain opportunities created from the void left by the failed businesses. So the good news is that if you prepare and play your cards, right, a recession can help you grow your business in the long run. So what do we do here? The first step in preparing to weather the recession is to assess your current risk. Joe Rando (09:28): And there are specific areas to look for risks. Most businesses, they can be classified as follows: 1) risk to revenue, 2) risk to expenses and 3) risk to suppliers and service providers. Risks to revenue are usually based on the risk of losing customers. How crucial are you to your customer's business? Are they sunk without you? Or are you just a nice to have . There is also the scenario of doing the work, paying the suppliers and then not getting paid, right? That really stinks. Watch out for signs of trouble in your customers and be a bit cautious if it looks dicey. The next risk to expenses, they're more rare. Some bank loans can trigger a full repayment if your business reaches certain thresholds. Things like revenue, loan to value ratio and so on. So look for these, right? If you have a loan from a bank, read the fine print and see if there's anything that could trigger them to come and try to collect all the money from you at once. Joe Rando (10:22): If you have something like this in your loan, keep following the rules of the loan as best you can. And if the bank comes calling, talk to them and explain what you're doing to keep your business running. Banks don't want your business and it's unlikely they even actually want your house, which hopefully you haven't pledged. What they really want is just to be paid back. Your job is to assure them that this will happen eventually. Okay, So let's look at risk to suppliers and service providers. And this is something you should consider. What would happen if one of them went out of business. If you have a single source supplier, how likely are they to go out of business? Is that IBM or Bob from up the street. So you need to look at that stuff and be prepared. So let's look at preparing. There's a number of things you can do. Joe Rando (11:05): But the first step, as I said was to assess those risks. And if all of your customers went away tomorrow, what kinds of expenses would you have? So let's look at that. Do you have rent? Do you have loans, minimum monthly commitments? All these are called fixed costs and they're a bear when the recession hits. Did you notice how some restaurants survived the pandemic while others folded? This was likely a function of whether they owned their building or paid rent. And also whether they had bank debt or not . Next, how much money do you have saved? Are you spending everything you make? If so, is this really to survive or could you save more by upping your frugality a bit . A fact of life is that everyone needs a cushion and this is especially true for solopreneurs. So to prepare for a recession, you should definitely do the following. Joe Rando (11:50): Look at what you're spending money on in the business and in your personal life and see if you can make cuts. Look at your debt. If it has a low interest rate, don't pay it off. I know this sounds counterintuitive, but if it's a good deal, if it's low interest, don't pay it off because banks will not loan you money when things are bad. So if they've given you money under reasonable terms, keep it, cuz you may need that money to survive the recession. That said, with respect to any high interest loans like credit cards, find a way to pay 'em off. They just keep accumulating interest, which is deadly. And then look at other fixed costs. Is there a way to reduce or eliminate them? If so, do so. Another thing you should strongly consider doing is finding a secondary source for critical suppliers and service providers that are potentially at risk. Joe Rando (12:33): Like I said, if it's Bob from up the street, can you find somebody else that can do what he does in case he tanks? I also recommend doing a formal review of your business as part of this process. Take a look at the refined reimagined podcast from the solopreneur success cycle. I put a link in the show notes, or you can just Google solopreneur success cycle refinery, Imagine. And that will, I think the top hit will be that podcast. Okay. So let's talk about once a recession has impacted your business, what do you do? So once this happens, you need to think about how to survive under changing circumstances, cuz it's not just gonna be going according to plan. One thing regular businesses do is trim payroll by laying people off. But you're a One-Person Business so that's not an option. But there are things you can do. Joe Rando (13:19): So one thing, I'm a big fan of paying my bills on time. Vendors appreciate that and they treat you better when you do it. But when things get tough, strategically slow paying your bills can conserve cash. As we've talked about before, cash to a business is like blood to a body . Suppliers won't love it, but if you've been good for years, most will cut you some slack. If you do find yourself in a situation where you are unable to make timely payments on any bill, do not hide! The best strategy is to call them before they call you. Tell them what's happening and assure them that they will eventually get paid. Call regularly and assure them you haven't forgotten about this and still intend to pay it. So many people are gonna be hiding from them that they'll likely spend their time chasing those folks and leave you mostly in peace. Joe Rando (14:05): Third thing to do is work with your customers. They're getting hurt just like you. So don't call up screaming cuz they didn't pay on time. Don't ignore them either. Try to get a commitment for when the bill will be paid and then call or confirm before the agreed date. And most importantly don't despair. Recessions can seem like they last forever, but they don't. This will end. Your job is to survive and come out in the best shape you can. Once things start humming again, you'll be back in business better than ever without some of those competitors that didn't make it. So that pretty much sums up my take on this. In summary inflation and recessions are not fun, but they are survivable and can even provide an opportunity to improve your business. So face the scary stuff, think hard, make a plan and then execute against it and adjust as needed. Joe Rando (14:52): Find a way to make this time work for you and your business. Your attitude toward these challenges can make the difference between success and failure. If you have any questions about this, you can ask me or other experts on the LifeStarr community. Just go to community.lifestarr.com. Remember that LifeStarr has 2 Rs and you can find me in the Ask An Expert section. Happy to answer your questions. So that's it for today. If you want to listen to other episodes of this podcast or see the show notes, go to lifestarr.com/podcast, or you can find this podcast wherever you subscribe to your shows. So we'll see you in the fall with season two of the One-Person Business podcast. In the meantime, keep an eye open for the blogs and the long awaited release of the LifeStarr app. Take care. Carly Ries (15:41): You may be going solo in business, but that doesn't mean you're alone. In fact, millions of people are in your shoes, running a One-Person Business and figuring it out as they go. So why not connect with them and learn from each other's successes and failures. At LifeStarr, we're creating a One-Person Business community where you can go to meet and get advice from other solopreneurs. Be sure to join in on the conversations at community.lifestarr.com.