The 2023 Financial Outlook for Business Owners
Three years ago, around this same time of year, I asked a group of experts in the small-to-midsize business market to give me their financial outlook for business owners in the coming year.
In December 2019, the economy was strong; inflation came in at under 2%, unemployment was level at 3.5%, and the fear of a recession subsided. The experts were bullish for 2020. They all agreed that it would be a great start to the new decade.
Last week I asked another group of experts to provide their outlooks for 2023. As I type this blog post, inflation is starting to come down from a 40-year high, interest rates have skyrocketed after six straight increases, there are continued issues with labor, supply chain, and now consumer demand. So much has changed in 36 months. Below are comments from three experts in different segments within the small-to-midsize business market on how they see our economy taking shape in 2023:
Next year will continue to be a challenging environment for raising capital. Venture and Equity Funds are still raising money, and will continue to deploy capital, but at terms which will heavily skew towards investors.
In certain manufacturing sectors, we will be insulated due to the cash flow we generate. Banks and other financial institutions will continue to partner with companies that show healthy profitability.
Companies focused on growth will need to pivot to profitability. Founders and CEOs need to cut their spending and ride out the financial storm. Conserving cash will prove to be critical – no one knows how long this could last.
The Fed will continue raising rates until inflation breaks in a meaningful way. Consumers will continue to feel pricing pressures at the pump and the grocery store. Discretionary spending overall will slow.
With layoffs coming and demand softening, we will see supply start to creep back up forcing sellers to lower prices. The Fed has repeatedly stated that rate hikes is their only weapon against inflation. Expect more.
Lastly, small and midsize companies must be more diligent than ever with cash to keep enough fuel in the tank. Watch your spending and get customers to pay their invoices.
In 2023, it will be harder for many small business owners to get access to the capital they need to run their companies. They will likely have to cut back on their expenses or pay higher interest rates to borrow the money they need.
On a more positive note, inflationary pressures are expected to decrease in 2023, and there's evidence supply chains are returning to normal.
Next year will present both obstacles and opportunities for small business owners and entrepreneurs. We are likely to see lower barriers to entry in some markets due to companies cutting back on their investments. However, in other markets, prices could remain artificially high due to price-gouging and the pursuit of increased profit margins. So, it's essential you keep a close eye on your cash flow to make sure increased costs don't put a crimp in the cash you'll need to take advantage of potential investment opportunities.
In 2022, we witnessed six consecutive interest rate hikes from the Federal Reserve to stem the tide of runaway inflation. This month, there was a slight downturn, but it’s probably not enough to prevent the seventh and final rate hike for 2022.
Hopefully the government gets their wish of cooling down inflation without causing a recession in the first half of 2023. If so, we can expect a better second half of the year. We should also see reduced labor issues thanks to the work done by the Fed and the impact of technology. Additionally, the current supply chains aren’t as backlogged as they were this past summer. When the flow of goods runs smoother, less capital is needed.
Speaking of capital, business owners need to stay close to their bankers and whoever else can provide them with access to money, such as vendor financing or asset-backed loans. The cost of debt capital will be more expensive in 2023 due to higher interest rates. However, in most cases, it is still cheaper in the long run than giving up equity, especially from a control and dilution perspective.
I advise business owners to watch their cash flow, stay on top of receivables, and make smart capital investments where there are opportunities for your business in a weakened economy.
Whether you choose to tackle obstacles or chase opportunities, next year will be a pivotal one for small to midsize businesses in the United States. Keep both eyes on economic indicators in your specific industries as well as on your company’s cash flow. Track inflation, interest rates, and all issues pertaining to your business (e.g., labor, supply chain, consumer demand). And always have a backup plan, because it is highly unlikely that next year will go according to your original plan.