As we suffer through the dog days of summer, Hurricane Debby and a global stock-market selloff entered the scene to add insult to injury.  Hurricane Debby made landfall on Monday as a Category 1 storm in Florida, where it is expected to bring severe flooding to the southeast Atlantic coast.

A different kind of heat has stormed through the global stock market.  A volatile week turned uglier as the Labor Department reported job growth in July slowed sharply, and the unemployment rate rose to its highest level since 2021.  Concerns about a slowing economy have U.S. indexes sliding and volatility spiking.  Justin Lahart writes, “While the labor market was bound to cool down from its post-pandemic hiring spree, the question now is whether it will keep softening right into a recession.”  On Monday, Japan’s Nikkei Stock Average had its worst day since 1987.  Movements in the market that generally take months to develop have happened over a few days after a slowdown in U.S. economic data and the Bank of Japan’s decision to raise interest rates on July 31.

As the heat waves, hurricanes, and potential for a recession loom, we wanted to take a step back and highlight three strategies family business directors can adhere to in these volatile and uncertain times.

Manage Your Complete Family Balance Sheet

Your family business may likely be one of your largest assets, but it is not the only one.  Thinking holistically about your family’s complete balance sheet, not just the operating business, is a good mindset for fostering longevity, family harmony, and shareholder engagement.

Family business directors are responsible for deciding how to finance the portfolio of assets that comprise the family business.  Those financing decisions may be different when made through the lens of the family’s complete balance sheet.

Leverage decisions, in particular, can benefit from the wider perspective of the complete family balance sheet.  Prudent leverage at the family business may allow for broader diversification of holdings and les overall risk for the family.

An accurate picture of the complete family balance sheet will ultimately help inform the decisions made at the family business level that optimize shareholder returns and maximize total family wealth.

Enhance Focus on Capital

Lazy capital is capital on the balance sheet that does not generate a fair return for family shareholders.  We have previously warned family business directors about lazy capital and the pitfalls of allowing excess cash and other non-operating assets to accumulate on family business balance sheets.  But family business directors must ask themselves: Is there a purpose behind the cash on our balance sheet?  Have we accumulated cash with intention or through inattention?  What is our cash doing for us?  Especially in volatile times, family businesses that hold some cash on the balance sheet can significantly reduce risk.

Some families can leave a bit of marginal return on the table if it helps push the likelihood of financial distress to a negligible level.  To take full advantage of market dislocations, sometimes it helps to be your own banker.  Ample cash on the balance sheet can afford your family business that luxury.  There is no single right answer that will fit every family; however, directors need to acknowledge the tradeoff, calculate the decrement to return from holding cash, and be deliberate about the decisions they make.

Maintain an Adaptive Forecast

A forecast is a tool; to be a good tool, it must be adaptable to changing facts.  Inflation, labor market trends, and global fluctuations have made it difficult to forecast how one’s company will operate in a rapidly changing economy.  Rather than stress about the exact measures, aim for consistent measurement, understand the drivers of your selected metrics, and maintain adaptability in your budget and forecast process.

Being able to pivot when needed is vital in unpredictable times and allows you to execute when opportunities arise.  Learning from past budgeting experiences, both good and bad, as well as maintaining an adaptive forecast process, can help develop actionable plans for your directors to rely on.  As the public markets continue to reel and the chance of a recession increases, now is the perfect time to review your budget process and prepare for what lies ahead.

Conclusion

Volatile times are never easy to navigate, but managing the complete family balance sheet, focusing on capital needs, and maintaining an adaptive forecast process can help family business directors keep the ship on course.  Finding the right strategy requires considering the attributes of the business, your industry, and your family.  Give one of our professionals a call today to review your situation in confidence and see how we can help.