Executive Highlights: California Business Reopening and Economic Recovery

On June 15th, almost 15 months after the first shutdown orders were issued in the Bay Area, California “fully reopened” its economy. This is an important milestone and an opportunity for us to both reflect and plan. As we look forward and discuss what the reopening means for business, at ClearPath we believe it is important to keep each new challenge in the context of the past 15 months. Just one year ago, business leaders were fighting for survival: setting up remote networks, struggling to obtain everything from PPE to laptops, adapting to constantly changing restrictions, obtaining PPP loans and other financing, and above all trying to protect the health and livelihoods of their employees. We overcame those challenges and more, both business and personal. The problems business leaders face in the second half of 2021 are small by comparison.

The most significant obstacles facing business going forward are: red-hot inflation, supply chain issues, and unprecedented labor shortages. Meanwhile, there are opportunities to take advantage of: a growing economy, strong valuations, and a booming M&A market.

Here’s a high-level summary of what you need to know, with additional analysis in the following pages:

Inflation

  • Inflation and higher commodity prices are here to stay for 2021. Specific materials may have reached their peak, but prices will remain elevated into 2022 driven by consumer demand in 2021 and production lag. This may be exacerbated by labor shortages that are expected to increase wages in some areas.
  • In the face of rising prices and logistics issues, consider increasing how frequently you place orders and allow for longer lead times. Higher order frequency can help average out rising costs without increasing inventory risk or tying up cash. Limit stock increases to fast-moving, hard-to-find, or strategic items only.

Labor Shortages

  • Consider flexible scheduling, remote or hybrid models. If your business does not support that flexibility, then predictable scheduling for hourly workers will help them arrange childcare at consistent times. Explore programs to assist employees with childcare, such as Dependent Care Assistance Programs (DCAPs) or FSAs.
  • Expect pay increases for minimum wage and some skilled labor in the first few months of the summer. Pent-up demand will encourage businesses to staff up and compete on wages – but remember that the federal unemployment boost expires on September 5th. At that point there will be a higher incentive for workers to seek employment.
  • People want stable employment, and they want careers – not jobs. A clear progression up through the ranks of the company, job training, or educational benefits can help employees see a future for themselves at your company. Employees also want to maintain or improve work-life balance, and employers who offer remote work or flexible scheduling are going to attract better candidates in the labor market. Competition will ensure that remote work and flexible/hybrid scheduling models are here to stay.

M&A Activity

  • M&A activity is hot and showing no signs of slowing down. Financial and strategic acquirers have significant amounts of capital to work with and are making up for lost time, while some sell-side mandates that were paused during COVID-19 are going back out to market. As the Fed continues easy monetary policy, expect a healthy M&A market into 2022.
  • Whether or not business owners want to exit soon, businesses should be prepared to take advantage of potential opportunities today. That means ensuring you have a growing, cash-generating, scalable business model, and limit dependencies on key personnel, suppliers, and customers.

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