Financial Strategies for Business Owners in 2022: A Conversation with Andrew Sherman

In the GetApp Small Business Strategy Series, Brian Moran, founder and CEO of Small Business Edge interviews four top small business experts about obstacles and opportunities facing business owners in 2022.

In the second episode, Brian interviews Andrew Sherman, partner at Seyfarth Shaw, LLP and author of 26 books on entrepreneurship. They discuss the major financial obstacles of 2022 for business owners including inflation, supply chain, labor issues, and the ongoing effects of COVID on the bottom lines of small-business owners around the world. Below are excerpts from the discussion.

Brian: Why is cash flow keeping small-business owners up at night?

Andrew: The first thing on everyone's mind is inflation and the direct and indirect impact of it. Millions of small businesses are looking at higher wage costs, higher energy costs, higher rental costs, etc. The key strategic question is “can a small business pass on price increases the same way that larger companies do?” Unfortunately, the answer for many small businesses is no. We may see inflation reduced by the third quarter of this year, but for now business owners must deal with higher variable costs in almost every area of their business, which puts a major strain on cash flow.

Brian: Is it hard for business owners today to get access to capital? Should business owners be worried about the cost of capital?

Andrew: There is a historic amount of capital still on the sidelines. Some of it has been deployed, but many investors are waiting out the pandemic. On the equity side, investors want Unicorns and Gazelles—the big deals. Most small businesses have been left out of the private equity and venture capital conversations. For those companies, access to capital can be found in the debt markets (e.g., local banks, equipment and leasing companies, credit unions).

The cost of capital will go up this year as interest rates begin to rise. As that happens, some banks will tighten their credit standards. It’s a big predicament for companies that are dealing with rising costs across their financial spreadsheets. But if a business can access capital right now, the fear of a quarter-point increase in the rate should not prevent them from taking that money to pay their bills.

Brian: What does 2022 look like for business owners when it comes to supply chain and labor?

Andrew: Let's look at it in three phases. Phase one is the pre-pandemic period with labor shortages and low unemployment rates. In January of 2020, both figures were at historic lows. Small businesses struggled to compete for qualified labor, but supply chains were working just fine back at the beginning of 2020.

In phase two, during the pandemic, everyone is afraid to come into the office. Employees want to work from home or remotely. Unfortunately, many small businesses couldn't enjoy the dividend of working from home and taking advantage of lower overhead costs. They are starting to lose employees who are making as much, if not more, money from NOT working as they are from working through government subsidies. On the supply chain side, things are starting to bottleneck because of factories shutting down for extended periods of time and not having the workers in the factories, docks, and driving the trucks.

The third phase has me perplexed. This part includes “The Great Resignation.” In the last 90 to 120 days over 15 million people have quit their jobs! Where did they go? What are they doing for work? No one knows the answer to that question; small-business owners should figure it out sooner rather than later.

Business owners need to be creative in filling in the gaps in their business. Remote workers mean that you have a wider universe of people who can work for your business. Hire more independent contractors and freelancers—think about recent retirees for part-time work. Small businesses should also consider outsourcing and/or automating parts of their business. On the supply chain side, labor issues are still contributing to the slowdowns at the factories overseas, the ports in the U.S., and the truckers getting the product to retailers. Business owners should expect the delays to continue at least into the second half of 2022.

Brian: How should business owners look at investing in their companies right now? Should they make investments today, or should they take a wait-and-see approach to the pandemic recovery in 2022?

Andrew: This may be a time when many small-business owners need to reinvest in themselves, in training, in employee benefits, and technology that automates their businesses. Most business owners create wealth from building their companies and one day selling the business. In 2022, consider deferring payments to retirement savings or personal savings, and maybe skip a vacation if necessary, and put that money into your business. I believe that if you are willing to make sacrifices now, you will get the dividends in 2023 and 2024.