By Cecilia Lynch
On the surface, the new tax cuts look promising for business and our economy. The press coverage has been exciting! We have learned of employee bonuses, stock buybacks, and even investment plans for repatriated profits. However, most of these announcements have been from very large companies, often US-based multinationals, not from the small business sector.
Small businesses will not see the same benefits that large corporations will. Many small business entrepreneurs are waiting for their accountants to learn the specifics about how the American Tax Cuts and Jobs Act will affect them. But, this tax cut goes much further than just a lower tax bill. In fact, a change of this magnitude will force change upon every business in every market in many different ways. Some of these forces will be favorable and some destructive if you have not prepared.
Three Powerful Forces
1. More money to work with.
The first and most obvious change resulting from tax reform is that businesses will have more money to work with. The result is that every business now needs a new set of financial assumptions because of the lighter tax burden on profits generated from operations. However, in many cases, a more significant force will be huge cash balances moving from the balance sheet into working capital primarily from the 2.6 trillion dollars of repatriated foreign earnings.
These new sources of funds mean every executive team will have more money to invest, pay down debt, take profits, share profits or shift equity positions. So why does this intensify the competitive pressures on small businesses? Because larger companies have been engaged in scenario planning for years as they advocated for these tax cuts and they have all their plans made and are now in the implementation phase of making them happened. These plans will impact markets where small businesses feel they have opportunities to grow or a solid position in their market. Larger companies have deeper reserves to dominate any market. They will be innovative and creative. You may not see them, but if you see an opportunity, don’t be fooled, it will not be too long before they see it too.
2. More emphasis on employee retention.
If you have not heard the battle cry yet, perk up your ears. The wage war has begun! We hear about bonuses because they are great headline grabbers, but they have no long-term impact on profitability. What is real and noteworthy is that unemployment is at a 10-year low and wage growth was lower at the end of 2017 than it was at the end of 2015. However, this trend is quickly coming to an end.
Wages and salaries will increase because the new infusion of capital will spur more growth and a strategy used in the past to mitigate wage growth may be less viable today: immigration. As a result, companies will have no choice but to increase wages and benefits to find and retain good employees.
During the last economic “boom” (1991-2001) employment growth was fantastic (over 22%). It was very hard to sustain this growth. During this period immigrants as a share of the US population grew from 7.9% to 11.1%. What if that can’t grow? Even if your business has never depended upon immigration, the demand for workers will impact your ability to hire and retain the staffing you will.
So, how can you prepare to win the wage war?
Step one, benchmark your compensation and keep a close eye on it to stay on par with wage demands. However, you cannot stop there.
Step two, build a strong culture to retain current employees. Gallup’s research tells us only 12% leave because of pay. So, even if you stay on par with your compensation program, you could still be at risk of losing key talent. As a small company, you should have a competitive advantage over larger more impersonal corporation because of your culture. A strong company culture where staff feel a tight bond and pride in affiliation can protect your company against people jumping ship or getting plucked from your workforce.
However, if you have not already built a strong company culture, you need to invest in it now. If you want to take a simplified path towards strengthening your culture. Read my blog post, “The wage war has begun. So, what can YOU do about it?”.
3. Changing markets and competitive
I believe strongly that everyone’s market will look significantly different in 12 to 18 months. The investment windfall created by the tax cut will accelerate in the first year. Many corporations are ahead of their smaller competitors because they have been engaging in scenario planning for years. As we ready about these plans, I wonder what are we not hearing about?
I believe shifts are happening quietly now. There will be even more mergers and acquisitions announced as well as new partnerships formed and unusual clusters emerging to consolidate market share and strengthen capabilities. There will also be big “players” seeking new markets to diversify their growth strategies. You may find a leader in complementary market jumping into your market if the growth potential looks promising. As I noted in #1 above, these larger corporations have more ample funds to explore a wide range of new growth strategies, and sooner than later it will impact your small business.
My recommendation is to engage in strategic planning now. Gather your awesome team to openly share market intelligence and create possible future scenarios. Then, create response strategies if market conditions shift. Better yet, select the scenario where you think you can compete and win, then use some of your tax cut to make them happen. If holding your space is the best option, then the time you spend on strategic planning will prepare you for a quick response when you need to act.
How well do you think your small business plan will stand up against these forces? If you are unsure, start your strategic thinking now. Remember, it is always true: opportunity favors the prepared.
Cecilia Lynch is the founder, CEO and chief strategist at Focused Momentum® and a leading authority on strategic planning and development. After two decades developing highly successful strategic plans for corporations, from Fortune 500 to start-ups, and non-profits, she is now making the process of developing strategy available to everyone through her book, “Strategic Focus: The Art of Strategic Thinking” and Strategy Class®, a program that demystify the overwhelming task of developing a strategic plan. Learn more about Strategy Class at www.strategy-class.com