Surviving, and Even Thriving, in Tough Economic Times

Clients need their CPAs now more than ever before. Of course, no one can say for certain when the recovery will come, but economic indicators point to late 2009/early 2010.

As a CPA, what should you be telling your clients, both individuals and businesses, to do today to help them through these challenging times? Mark J. Smith, CPA/PFS, CFP, CIMA, and Derald L. Lyons, MT, CPA, CVA, both members of the CSCPA Investment Committee, which Lyons chairs, offer some tips. But first, they say, don’t forget that recessions end 100 percent of the time, and when the recovery comes, it will be a strong one.

It’s time to get serious, and separate the needs from the wants, Smith says, both personally and professionally. "It’s time to batten down the hatches, and ride out these next 12 months," he cautions. "We ask our clients to cut back on the wants wherever possible. New car? Wait a few more months. Trip to Europe? Go to Yosemite instead. This runs counter to what the government wants us to do, but we want to protect our clients. Help clients recognize what is discretionary and cut back in the near term," he encourages.

Lyons advises organizations to keep cost structures low to maintain profitability. In addition, be conscious of minimizing bad debt, collecting receivables, and keeping your business diversified so that a tightening in one area doesn’t mean drastic changes in revenue for the organization as a whole. Budgeting also is extremely important, he says, as is systemization which will create efficiencies. "Getting into a lean and mean mode will be a stepping stone for increased profitability as the economy rebounds," he adds.

Smith says evaluating overhead and trimming costs, which may or may not mean downsizing staff, needs to happen sooner rather than later if you want to preserve net profits. He also suggests maintaining higher levels of cash reserves to weather a decline in revenues. Because the Federal Reserve has effectively lowered interest rates to zero, Smith advises controllers to take a look at short term municipal or corporate bond mutual funds which are offering returns between two percent and four percent.

Even though we’re talking about economic decisions, emotions often get in the way of smart investing. Take a look at history for a little reassurance: the recovery after the Depression took only four years, and the recovery from the ’73-’74 recession took just 18 months. But "people become emotionally distraught," Smith says. "They begin to think about just surviving, and in that emotional mode, there will be tendencies to make mistakes."

The most important thing? "Have a plan, and stick with it," Lyons says. Many clients are questioning whether or not they should change ships midstream. "It is a very tough time out there for everyone," he says. "That being said, out of times like this, there are careers and fortunes made. Many are saying it’s the best buying opportunity of our lifetime."

Smith agrees and adds that staying the course, or even diving in and investing when all others are selling can take "emotional guts. Very few people have that Warren Buffet mentality. But the reality is that prices are discounted 40 percent. The proper strategy would be to re-evaluate your investment policy and instead of being a seller, be a buyer."

It is, of course, the worst possible time to sell. But now is the time to evaluate clients’ holdings, discuss whether or not risk tolerances have changed, and see if portfolios need to be revised to reflect current economic conditions keeping three words in mind: diversification, diversification, diversification.

It’s hard to think big picture when the media is reporting that the sky is falling, says Smith. When you compare today’s economy with the Depression, when there was 25 percent unemployment, no FDIC insurance, no financial regulatory body like the SEC or the Federal Reserve, and the government took all the wrong steps to correct the situation, you’ll see there is a different approach this time around. "We will see this problem over sooner rather than later," Smith says. "What we have now is a once-in-a-lifetime buying opportunity." Lyons suggests reading The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It by Michael E. Gerber, which encourages business owners to work on the business instead of in it.

"We get so caught up in the day-to-day operations instead of systemizing, creating checklists, and developing internal controls so that the business can run without us and we can focus on growing the business," Lyons says. "If there’s any time to be focused on growing the business, it’s in a tough economy. CPA firms, those that are able to focus on helping their clients get through times like this rather than just focus on the compliance work, and those that can wear their consulting hats and help clients cut costs, systemize, and get efficient by helping with budgeting and forecasting—those are the ones that can thrive in these turbulent times."

Takeaway Tips

Recessions always end—100 percent of the time.

Evaluate spending—cut back on discretionary spending as much as possible.

In times of declining portfolio values, revenues, and income, raise your cash balances to prevent you from needing to sell at depressed prices.  Given low interest rates, look at short-term bonds.

Recognize that during trying times, your emotions will tend to encourage you to do
the wrong thing.  Evaluate your long term position.  Rebalance your portfolio.

Stocks are extremely cheap.  Returns going forward will be positive.

While diversification does not eliminate risk, it can reduce risk  throughout a market cycle.

Have a plan, and stay with it.

“Getting into a lean and mean mode will be a stepping stone for increased profitability as the economy rebounds.”
Derald Lyons, CPA