Interest Rates And Inflation Stay High! Could Costs Cause You To Lose Business?

[00:00:00.00] - Alice

Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:33.06] - Dan Paulson

Good afternoon, and welcome to Books and the Biz, the punt version. Oh, man. It's been a day of change. What can we say? What can we say? Absolutely. How are you, Rich?

[00:00:50.11] - Rich Veltre

I am okay. I think I'm going to talk like this because my Internet, it keeps going in and out.

[00:01:01.02] - Dan Paulson

Again, another thing we'll punt on. Unfortunately, you only have the two of us today, since our guests business came first. And we definitely understand that. And in fact, when we do get them on, that is something we will talk about, because the challenges of being a startup company and growing your business, sometimes you have to go clients first on things, and that is completely respectable. So we scramble this morning. We came up with another subject because, hey, news still happens, and Looking in the news from yesterday, well, one of the biggest discussions was interest rates and the fact that they didn't come down. And I'm going to pull up another article I found here from not too long ago. Another thing that popped us up. Now, Rich, I know you have a new driver in the house as of today. I am probably going to have one in the near future. So we had to get a new vehicle. So guess what? I bought a new car yesterday. And interest rates are a bit of a sticker shock compared to where they were even just a couple of years ago. So interest is affecting everything.

[00:02:05.10] - Dan Paulson

And as this article points out, we're starting to see that lag effect in the economy all on an election year. So You got to figure the powers that be behind the scenes are trying to figure out a way to make the economy better. And of course, we hear the news and they're always saying, well, the economy is great. Don't believe what you see. Don't believe that your groceries are up, or that your car payments are up, or that you can't buy a house because of this, that, the other thing. So there's a lot going on, but it all impacts business. And that's what we're here to talk about today. So Rich is the financial guy. I'll let you jump in and share your insights on where this whole interest rate thing is, and where it's going to be taking us over the course of the next 6 to 12 months.

[00:02:55.29] - Rich Veltre

Yeah. Well, unfortunately, I don't have a crystal ball. I really wish I did. Because I'd be a millionaire just predicting everything for everyone. But the way I see it, they can talk me till they're blue in the face, okay? Trying to explain to me that things are going to get better and things are going to come down. I don't believe it. And the lag effect up will be the lag effect back. So even if you're trying to tell me that you're going to be able to reverse things and put it back to the way it was before even a year or so ago, I don't see it for two reasons. Number one, the government can only do so much. And the lag effect is what we always see when the government gets involved. When they do something, they do something in a big way, and that's fine. But usually the effect of it doesn't happen until a while later. Anytime they gave us a stimulus check, it was supposed to give people the ability to go out and spend money and spur the economy.

[00:04:00.04] - Dan Paulson

Well, it did. It did exactly what it was intended to do.

[00:04:04.22] - Rich Veltre

But a vast number of smaller people took the money and put it in the bank account to protect themselves, which is fine. But it didn't do anything for the economy if it's sitting in the bank account. So I know we had that issue. But I think that this article was really, really well written, because when you get down to it, it really starts to tell you what's happening and who it's happening to. So somebody thought this one out because the lowest income earner is already feeling it. The highest income earner isn't necessarily feeling it yet. The middle income earner is starting to feel it, which is why you're hearing it more. The middle earner is the one that always gets beaten up from both sides, from the top side and the bottom side. The middle one, it's like a bell curve. You just don't want to be in that middle ground. And it's starting to affect them. And before I read this article, I had heard the stats where the payments are starting to be late. Mortgage payments are starting to be late. Credit card payments are starting to be late because people are trying to hang on to their regular lifestyle, not exorbitant, just regular.

[00:05:21.23] - Rich Veltre

And it's getting harder and harder to do it. So they're running up whatever they can run up to try to keep things normal. So somewhere along the line, that comes to a wall, whether their credit card limit runs out or the interest rate is just so high, they can pay on it, but they're paying on a schedule that now allows you to go For it in a year, you have a credit card. So that's Starbucks. If you're 10 and you bought a Starbucks on a credit card, you'll be 58 when you pay that card That's a drink.

[00:06:02.27] - Dan Paulson

Hope that coffee was worth it for you.

[00:06:05.14] - Rich Veltre

Yeah, I'm on the sandbox, so I apologize for that. But the article is really, really good. So anybody who hasn't read it yet, I would definitely look this one up.

[00:06:16.01] - Dan Paulson

Yeah, we'll definitely put this one in the link in the comment section, so you'll be able to see it once we get this up on the podcast, the audio podcast, that is. Yeah, I found it intriguing And I guess it's a blueprint of every other economic situation we have, that you go from good times to not so good times. And we're just in that doldrum middle period right now. What's interesting about this time, though, is to me, it's taken a lot longer to come along, and maybe it's because those stimulus checks went out, or maybe it's because of some other outside factor. I think there's a couple of challenges that I see that have probably extended this a lot longer than it should have in the past. Again, the employment issue. We've talked about this ad nauseam. There's fewer people to be employed, Which means the jobs that are out there are still getting filled, which means the unemployment rate is low, I should say. Now, the government tends to play games with some of those numbers, and You also have to look at, again, where those positions are being filled. You look at the more experienced people, the more white collar jobs, the more technical skilled jobs.

[00:07:40.05] - Dan Paulson

They're still struggling to fill spots. Now, to your point, what you said is the people of lower income are feeling this now. That's because you've got the situation, let's talk about California again. They raise their minimum wage to $20 an hour. Well, what did a lot of the fast food places do out there? Well, they cut staff or they close businesses. Okay, well, you're making $20 an hour. That's only if you're working. If you're not working, it really doesn't do much good for you. So you're seeing a lot of these lower, what we would call unskilled labor jobs going away. And if that's the case, then those people don't have any income. They're on unemployment or if they're past unemployment, then they've got other issues coming up. So we're starting to see that happen in those areas now. We still buy goods and services. And I think to your point, the people that put money away, they did remodeling projects when they felt comfortable doing it, or they got that new car and they paid a premium for it because car prices have gone through the roof right now. I can speak to that personally, since I dealt with that yesterday and just about crapped my pants when I saw I was going to be paying on a car.

[00:08:52.09] - Dan Paulson

But it's our goods and services have gone up, whether you go to the grocery store, whether you go to the car lot, whether you go to the hospital, whatever it might be, those expenses have increased dramatically. And now that we're in an election year, people are starting to ask themselves, well, do I feel like I'm better off now than I was a year ago, two years ago, four years ago, so on And I think people are struggling to answer that question. Now, what does that have to do with business? Well, if people don't have money to spend, they're not going to spend that money on, in most cases, your goods and services. Now, I haven't seen much yet or haven't heard much from clients or colleagues that things have slowed down a lot. I have heard from some that things are getting slower. So they're starting to see something shift. I know when I was in the car dealership and talking with the sales guy and the dealership owner because I know him, I'm like, how are things going? And he's like, well, it's been slow. It's getting slow for the last couple couple of months.

[00:10:01.08] - Dan Paulson

Again, we're paying a premium on vehicles. Most people are choosing to make their old vehicles last longer, or maybe they're going the used route or getting something more economical. So we're seeing that, and that's why we're seeing a lot more inventory on the lots there, too. So I mean, what are you hearing from your groups?

[00:10:21.03] - Rich Veltre

I'm definitely hearing the same, that things are slowing down. It's hard because Because a lot of it feels like, and it's my new catchphrase, the water-cooler talk. You start to figure out, are you actually seeing this, or is this what you're hearing from someone else? The hearsay model doesn't really work. It doesn't help you too much. So I have heard a bunch of people saying that it's slowing down, that projects are slowing down. Most people are trying to blame it on the fact that there's a level of uncertainty because it's an election year. And I go back to what I said at the beginning when I was talking before, the problem I have with that is the government doesn't necessarily have a big enough effect. So In November, when the election is over, mid-November, am I going to see an uptick just because everybody's going to have this perception that the government is going to do something for them in the middle of November? I think a lot of people have that thought Hey, magically, I'm going to wake up on November 15th, and everything's going to be fine. Why? I'm trying to ask people, why do you think that it's going to be different?

[00:11:40.27] - Rich Veltre

Number one, whoever becomes President in November doesn't actually take office till late January. So are you telling me then that there's going to be another two months?

[00:11:55.26] - Dan Paulson

It's hard to say. It could be- Repolishes the furniture. And- You're cutting out there, Rich. It's- Yes. Yeah, everything lags. So the government or the powers that be, the ones that are in power right now, are going to do everything they can to make what's going on look good, as good as possible. So that way, when you're in that voting booth, you're asking that question, well, are things getting better? Are they getting worse? And if the answer is they're getting better, they're hoping that the vote then will go their way. If the answer is they're getting worse, then they have a lot more concern because they figure, well, somebody else is going to benefit from all this negative publicity. And then new power comes in, but they still have, even in the best case scenario, it's still going to take 6 to 12 months to make any meaningful change, which is going to take another 6 to 12 months to make any effect that would be noticeable for the rest of us.

[00:13:00.10] - Rich Veltre

And the other thing is, too, there's buckets, right? You look at the expense buckets. We started talking while we were doing the podcast. So within the last year or so, we were talking. And at one point, we had a conversation about insurance and the insurance cost effect. How many of those people had already renewed and are now renewing with the new rates that are coming out from the insurance companies? That effect had a 12 month lag, right? Because they would have had last year's rate. Now all of a sudden, they're heading this year's rate. Mine went up 40 % on my personal home.

[00:13:40.23] - Dan Paulson

As did mine. Yeah.

[00:13:43.23] - Rich Veltre

So I mean, They're trying to recoup costs for something that's national. So I'm paying for whatever other event happened in another area. These all have effects. And when they hit all at the same time, it's like a tornado. You You didn't necessarily see it coming because you couldn't possibly expect that every single expense you've ever had is now that much more. And add to that labor that everybody else has their costs going up, so they're looking for more money. So you add it all up. And from a finance standpoint, what do your projections look like anymore? Are they reasonable? I spoke to someone yesterday who was saying that he's seeing that there's a good possibility he could hit a slowdown between now and the election. And what does he do? Is he supposed to jump on that bandwagon and think, well, everything's going to be better in November, so I'd try to weather it out? Or do you go with what you're seeing because you're seeing the fact that it might actually get even slower than it is now. So across the board, this is what you wind up hearing. And then And you're at the point where somebody like me is trying to sit there and say, well, I don't know how to do the assumptions to figure out whether or not this is going to happen and what the magnitude really is.

[00:15:13.06] - Rich Veltre

Are you telling me you're not... Are you down to getting only one job? And if you don't get it, where do you stand? And how do I build a model that's going to say, here's how we're going to actually look a year from now, which is what everybody wants. They want to know, how am I going to be a year from now if I do all these things that I'm still doing?

[00:15:30.18] - Dan Paulson

Yeah, and most, if not all, businesses function on a lagging indicator as well. So even the money you're earning today in a lot of cases, there's expenses that come to that that may not get paid till next month or even two months down the road, depending upon how they cycle in. So you're looking at a situation right now. So take your example, where he's looking at sales slowing down in the near future. He's also got to be looking at, wondering, well, I know I've got money going out. How am I going to, back to your projection example, but from an operations side, what strategically am I going to do to make sure I cover what I've already spent and realize I still have to spend more in order to get that work Because now that work is going to be harder to come by. And so I look at from an operations side, and I'll relate back to a colleague of mine, Laura Allen. So here's your plug, Laura Allen. She talked about building a war chest, making sure you have money set aside for, I call them rainy day funds. So you've got some resources there when things start slowing down, that you can actually ramp up certain aspects of the business, whether it be marketing, whether it be operational improvements But now everything becomes much more critical.

[00:16:48.02] - Dan Paulson

So all those things that you put off when times were good and you were making hay, and well, this needed fixing, or that needed fixing, or we needed to optimize that, but we didn't do it. Now it's like, oh, crap. Okay, if you don't do it, you're going to end up in a situation where if not enough income is coming in, you're now inefficiently spending more and wasting more time and resources to do the jobs that are limited. When And really, you should be in a position where other companies are doing that, you're able to charge ahead and make stuff happen.

[00:17:23.14] - Rich Veltre

Yeah, I think the signs are there I think the problem is you really have to look for them because I do think it's very difficult to sit here and I'm on a number of different message boards, industry boards, and you hear, oh, I lost my job. I'm part of this layoff. And as part of the layoff, now I'm going to go start my own business, or I'm looking for opportunities because of this layoff. And then the government report comes out and says, everything's great. Look how many jobs we have.

[00:18:03.20] - Dan Paulson

Yeah.

[00:18:04.13] - Rich Veltre

What? Again, and part of me wants to jump on the water-cooler bandwagon and be like, yeah, you see, they're all cheaters, and they're all telling us the wrong information and all that good stuff. It doesn't get me anywhere. What I look at is, is the country still looking at things in a way that happened five or 10 years ago? Because we're not Not that five or 10 years ago anymore. The economy, everything should be moving faster. So when you come out with stats and you tell me, well, in 2017, I don't care about 2017. Do I care about what happened? Sure. Because you got to understand the history so you don't do it. The old adage. But 2017, we weren't running like we're running now. So you can't use the same methodology in 2017 and say, here's what's going on. I can't believe you.

[00:19:06.23] - Dan Paulson

Well, but history tends to repeat itself. And whether it's stats or numbers, most companies, when times are good, focus on the good times and forget that for every good time you have, at some point in the future, things are going to change. And the businesses that are best prepared for that are the ones that are going to, A, survive, B, C, thrive, and C, be able to figure out how to pivot to the next thing. If you're on your heels all the time and you're just trying to figure out how to keep the doors open, that's not a good position to be. And I think in the next 12 months, we're going to see a fair amount of companies that are going to be in that role, in that position, where they're going to really struggle on figuring out what's going to be that next opportunity. And are they going to have the resources to go there? That's what I'm looking at, and where I'm starting to talk with my clients, is You need to be set up so that you can hit the gas when everyone else is hit in the breaks.

[00:20:05.10] - Rich Veltre

Yeah. I definitely think that my biggest worry is for the small business. And it's even scarier for all these people who said, well, I got laid off, so it's finally time. I'm going to do it on my own. Okay. But there's a lot of people who are already in this market. So now you're flooding the market. You think you're going to come out and make a high salary, but now you're in bigger competition, which is going to have lower... It's going to drive pricing down as opposed to up.

[00:20:34.09] - Dan Paulson

And what makes you different from now all the market people that are in there?

[00:20:39.21] - Rich Veltre

Yeah. And then figure out, you have to basically put it on yourself and basically write down the fact, write it down right in front of you, a nice big piece of paper that says, I'm fragile. I'm a small business. I'm fragile. And keep reminding yourself that you're fragile. Because a lot of people will jump in and be like, everything's going to be fine.

[00:21:03.07] - Dan Paulson

Everything's great.

[00:21:04.29] - Rich Veltre

The cycle will come around. But you're fragile, because if that cycle, like now, if that cycle is longer than before, okay? You're thinking you'll be fine in two months. What if it takes you nine? What if it takes you 10 months? Your point is right on where I'm thinking, that people need to start building at least a small war chest. I'd rather tell you to put a big one because I'm terrified of the things that we don't know.

[00:21:36.09] - Dan Paulson

Yeah. Any war chest is going to help. Definitely. I'm terrified of things that-Do something. Yeah. It's good. You got to do something. Also got to keep in mind that in most recessionary situations, you're looking at 12 to 18 months before there's positive signs of coming out of a recession. I think the The earliest is typically nine months, but it's really about a year, year and a half before you start seeing those positive gains. And that's mainly, again, whatever government leverage pull, usually around interest rates, impacts how things go. Because lower interest, more working capital to utilize, versus spending it on interest expense. And that's really where it goes. And this is probably where guys like you and I go at odds with each other, because I know from the finance and you're looking at the numbers going, whoa, whoa, whoa, stop or cut back. Or you've got to figure out, as you point out, build that war chest. And I'm saying, well, right now is the go time, because 90 % of the other companies out there are doing the hitting the brakes and pulling to stop. So you got to figure out how to work efficiently and utilize your tools to the best of their ability.

[00:22:55.14] - Rich Veltre

Yeah. I think I've seen enough times where I I'm not huge. I'm a huge fan of cutting anything that's really, truly excess. If you think you're heading into a spot that's going to come up short or something is going to come out bad, then you definitely should be building a war chest, but you have to evaluate. Can you sell more now? Is there a way to do something different that pushes you to be able to build that war chest? Because usually the signals here are things are going down. So how are you going to build a war chest as things are going down unless you reconfigure what you're doing? Maybe it's time to look and say, is there something else we should be doing that bigger top line to surviving the decline. And I know there's a lot of finance guys. The first thing they do is they just start cutting things. And I'm looking at it like, at some point, you cut too deep. At some point, you're going to cut too deep. And then can you get back out of the bottom? So now you're just fighting your way back up, as opposed to, you're not weathering, you're cutting yourself too much, and then you have to try to get back.

[00:24:16.16] - Dan Paulson

Well, we see that time and time again. I don't think it's just the finance guy or the tax accountant. It's a lot of times the business owner because they go into panic mode. And I always believe in optimism. You You should be optimistic about your outcomes, but then you should also be realistic about what efforts are you putting in to make those those outcomes happen. If you're just going to sit back and ride the wave and hope everything's going to be fine, as we all know, hope is not a real great strategy to have. It's probably not going to work in your favor. So you really do have to sit down right now and start figuring things out. So as I said, things are lagging. You probably have lagging sales that are coming in that you can utilize some that money towards maybe a bit of a war chest, or you can start reinvesting some of that money now in what can you do to optimize software? What can you do to optimize processes? What can you do to build a strategy, essentially, to keep yourself going? What makes you unique? You better be able to answer that question in the down times, because if you can't answer that question, somebody else will, and they're going to get the business, and you're going to lose out.

[00:25:28.11] - Dan Paulson

And if there's a lot A lot of competition in your market, that's especially true. So whether you're a plumber, electrician, whatnot, there's going to be fewer jobs to have. There's going to be fewer opportunities. You got to make the most of the ones that are in front of you.

[00:25:42.17] - Rich Veltre

Yeah. I think I'm definitely on the same page there. I think, again, my biggest fear being for the small business because a lot of them don't actually do. Even in their head, they don't do the forecasting or the thoughts ahead. They're dealing with now or what's already happened. So I think it's time. One of the first things I would tell people to do is look ahead a little bit and see what's coming. Make sure you're not on track with a train coming at you. And if there are, figure out how you can avoid that train.

[00:26:18.11] - Dan Paulson

Well, do most businesses even know how to do that? Because how many businesses do you talk to that... Weren't we talking about this last week or was it two weeks ago where we were saying, You don't even know your numbers. You might know what your gross sales are coming in, but you don't know what's actually staying in the barrel. That whole barrel philosophy.

[00:26:40.09] - Rich Veltre

The barrel philosophy. I definitely agree that they don't necessarily have good numbers. I think if there's anything to suggest, get your numbers in order. I don't care how small you are. Make sure you're up to date so you can take a look and really understand where you're at. Because if you don't and you can't predict what's going to happen, you're just going to go into this thing in a reactive mode, and you're already behind the eight ball.

[00:27:16.05] - Dan Paulson

So from your perspective, from the finance side, if you were talking to a small business and here's the top five steps I would take if I were you to know where your finances are at, what would you tell Well, first of all, if you're using a bookkeeping software, like a Quickbooks or anything like that, make sure it's up to date.

[00:27:38.16] - Rich Veltre

At least at that point, the numbers, the history that you have, you'll know it's good. That's always step one, because if you don't have good numbers to go off of, then what's the point? But after that, I would say, how do you feel the business is doing? And then if you tell me that you have a good 12 months coming up, great. If you don't know, let's figure it out. Who are your big clients? Who are the ones that you can count on to say, these people are going to come back to me for the next 12 months? And then I might tell you, you might want to have a conversation with them just to make sure that they're on the same page, because a lot of the financials are just storytellers, right? They tell you what's really happening in the form of numbers. So now that you have an assumption, Try to get a feel. Are those people really going to do what you think they're going to do? Because the biggest surprise is going to come when one of these bigger companies or somebody that's your big customer says, we have to cut back.

[00:28:43.07] - Rich Veltre

It's always a scary conversation when they say we have to cut back. I would rather know before they actually do it. I would rather not find out when the checks don't come on time or the orders slow down. Great recession. One of the biggest things that happened for one of the companies I was working with was we did our numbers. And in the numbers, we started looking at it and said, Our inventory is rising. Why is our inventory rising? Because our customers had told us we're going to buy X, and then they bought X minus 30, 40 %.

[00:29:21.26] - Dan Paulson

And that's really the big difference right there.

[00:29:24.00] - Rich Veltre

We roll our inventory.

[00:29:30.21] - Dan Paulson

Yeah, you're cutting out again there Rich. Can you hear me? Yeah, those numbers can really help you with the forecasting side of things, definitely. Looking on it from our end or from the operations side, where's your strategy? Where's your opportunities? Do you have the right resources to go after those opportunities? If you don't, what do you need to change now? And that's where the marriage of what you do and what I do come together. And that's how you figure out how to do that, because ultimately, big chunk of resources is money. Do you have the capital that you can invest or reinvest to get the results that you're looking for? And if you don't, how do you get that capital? Are there ways you can lock it down now versus waiting until times are tough, because you never want to go to the bank when times are bad. The lending terms get extremely tight when the banks are concerned whether or not you're going to be viable over the course of the next 12 months. So you really have to set yourself up when times are good. Well, Rich, there's a number of people that I'm sure could utilize either your services or mine.

[00:30:39.08] - Dan Paulson

How would they go about getting a hold of you?

[00:30:43.13] - Rich Veltre

For me? Getting you hold of you. Sorry, I broke up there.

[00:30:48.17] - Dan Paulson

You're closed again.

[00:30:50.02] - Rich Veltre

Yeah, the Internet's going down again. There's a storm cloud going over. We'll see what happens here. But best way you can get a hold of me is rveltre@veltregroup.com. Just send me an email.

[00:31:00.14] - Dan Paulson

Excellent. And to get a hold of me, just go to danpaulsonletsgo.com. You can fill out a form there, schedule a meeting, and either Rich or I can help you figure out how you get through turbulent times, because sooner or later they're going to come. We all knock on wood and hope that we're going to get through this time and not have to worry about anything. But at the same point, you want to be prepared for it. So Rich, as always, it's been fun. You with your frozen looks, I think you're locked up again, but we will talk to you next week, and hopefully we will have a guest on for that. So talk to you soon. I'm frozen. Now you're unfrozen. Talk to you later, Rich.

[00:31:40.28] - Rich Veltre

All right.