Four local experts look ahead to 2023

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The business market is tighter and more unpredictable than ever, thanks to supply chain issues, inflation and broad labor shortages post-pandemic. So, what should small- and medium-sized businesses consider as they plan for 2023? We consulted four business and economic experts for recommendations that might help Whatcom County businesses not only survive, but thrive, in the unforeseeable year ahead.

“I think there is a very high chance of a recession in 2023,” predicted Hart Hodges, Western Washington University associate professor of economics and director of the Center for Economic and Business Research. Hodges also has served for over a decade, most recently as a principal adviser, with Waycross Investment Management. “There’s a lot of disagreement amongst economists, but I’m of the camp that if the Federal Reserve pushes the federal funds rate to 4.5% or possibly higher, then we will have a recession in 2023. We’ll also have higher interest rates that will go up and sit there for a while, which will increase the cost of borrowing as a business.”

The current target rate is 3–3.25%.

“Employers also need to determine how they will deal with or minimize the push–pull between workers and employers,” Hodges added. “Finally, they can expect greater uncertainty. It can come because of political divisions. You don’t know what’s going to happen from a regulatory or geopolitical standpoint. Even though that might feel far away, even small businesses in Whatcom County can be affected by the growing sources of uncertainty. They need to think about different risks more than they have in the past and come up with contingency plans.”

An increasing minimum wage and exempt/non-exempt changes
“One of the key issues is the impact of the minimum wage going up $1.25 per hour, which will put even more upward pressure on all levels of wages, not just the minimum wage,” said Tom Dorr, who has helped more than 4,000 businesses in the Whatcom County community for more than 25 years through his business, Tom Dorr and Associates, and as the former director of Western Washington University’s Small Business Development Center.

In 2016, Washington voters approved the gradual increase of the minimum wage each year, with an increase slated for 2023 of 8.7%, to $15.74 – the highest base minimum wage in the nation.

“That’s going to stimulate further inflationary pressures,” Dorr added. “To stay competitive, you’ve got to increase all levels of employee wages. The plan for that is critical.”
In parallel, state legislation passed in 2018 allowed the Department of Labor & Industries to update employment rules that determine which Washington workers are required by law to be paid at least minimum wage, earn overtime pay and receive paid sick leave and other protections under the state Minimum Wage Act. That has resulted in annual increases in the salary threshold implementation schedule for exempt (salaried) and non-exempt (hourly) employees. For example, in 2020, those earning over the $35,100 threshold could be classified as exempt employees.

“On Jan. 1, 2023, the threshold jumps to $61,000,” said Mark Harmsworth, a former member of the Washington State House of Representatives member and the current director of the Center for Small Business at the Washington Policy Center. “So you need to assess employees near the threshold and either increase their wages above the new threshold or make them hourly. If you’ve got 10 salaried employees just over the current threshold of $53,000, in 2023 you need a plan to absorb the $80,000 revenue hit just from the raises that will get them over the new threshold. And those numbers are scheduled to go up every year. By 2027, in the space of eight years, the threshold will have gone up $50,000 for each employee.”

Harmsworth, a small business owner himself as president of the information technology and cybersecurity company Methodworks Consulting, predicts that businesses will be forced to put many of their employees back on hourly wages.

“That will affect many levels of business, especially if your workers need to work over 40 hours a week sometimes or if you have a lot of employees near the threshold, like nonprofits,” he said. “When they’re hourly, they can’t volunteer any more time after 40 hours; you’ll need to pay overtime. So you’ll increase salaries to keep them exempt, but then when unpredictable things like COVID happen, a bunch of people will get laid off.”
Harmsworth recommends that employers look at their employees’ current hourly makeup and then plan to change the status of some while also planning for significant cost increases.

“You may want to redistribute workloads,” he said. “Perhaps you’ll go to shift work, and you may have to invest in some sort of timekeeping system to track time. That’s increased cost no matter how you approach it.”

Harmsworth and Dorr agree that business owners need to act now in preparation. “Don’t hesitate to increase your prices before Jan. 1, so you’ll be prepared to absorb those cost increases,” Dorr said. “And you’ve got to come up with key messages for employees to deliver consistently as part of a planned response to customers’ shock over those price increases.”

Recruiting and retaining a skilled labor force in a hybrid work environment
All sectors are having a hard time performing at or near capacity because they’re heading into year two or three of a labor shortage.

“The Fed is looking at data that suggests the labor market is still quite strong,” Hodges said, “meaning they can push hard on things to slow down inflation. But we’re missing two and a half million workers in the workforce right now. Some of those are people who worked remotely and stayed home with the kids during COVID and noticed their income only went down a tiny bit, so why go back? Some families moved to more affordable places and found they could live on just one income. And there’s a lot of people who are out on long COVID or are taking care of someone with it. I recently had to talk to 300 people in order to get six general laborers hired for a client. Workers are not so easily replaceable anymore.”

CJ Seitz, a certified business adviser and the current director of the WWU SBDC, agrees that staffing issues will continue to be a major challenge in the coming year.
“Employers can mitigate this by redesigning jobs to focus on value creation and by looking for ways to connect performance to compensation, via commission, incentives or bonuses, for example,” she said.

“All businesses need a recruiting and retention plan for 2023,” Dorr said. “Wages and compensation are obviously a huge part of that. Make sure you’re paying competitive wages by looking at employment security data and competitive wages listed on recruiting platforms like Indeed and Glassdoor.”

But more workers will also need to return to in-person work in 2023.

“My bias — everyone will need to be in some of the time because we need to interact, and it’s awfully hard to onboard new people, network for your next job and so forth from your home,” Hodges said. “Employers will need to think about where and how they can be flexible. I don’t think employees will fight as long as their employer can say, ‘here’s why I want you in.’”

Dorr also reminds us of the importance of retaining qualified, valued workers.

“A lot of poaching is going on, so you need to have a retention plan that considers job description review and where you are recruiting,” he said. “The old way of recruiting is gone. You should be looking for guerilla tactics in this marketplace that will find your qualified workers. One of the easiest things you can do is to increase and improve communication between management and workers. Don’t take things for granted. No. 2 is appreciation — it’s the No. 1 reason people stay at a job, because they feel like they are adding value, especially with millennial and Generation Z workers.”

Other experts agree.

“I also think workers are pushing for — and deserve — more meaningful work,” Hodges said. “Or at least more collegial and respectful relationships. You can’t view them as replaceable because they’ll go get another job at a higher wage.”

“Employers can also increase retention by making employees feel special,” Seitz said. “Offer flexible schedules to accommodate day care needs. Provide memberships in fitness clubs, discount warehouses like Costco or Sam’s Club, or travel services like AAA. Or participate in tuition reimbursement programs for employee development.”

When it comes to keeping good workers, we need to think outside the box, Dorr said.
“Maybe you should be giving performance bonuses instead of raises, so that when a company does well, that’s shared,” he said. “Instead of annual bonuses, consider doing it more frequently, like quarterly. Getting rewards closer to when the activity occurs embeds the response you’re looking for. Verify and clarify all your assumptions. For a worker that has been there 20 years, when was the last time you really talked to them? What’s your plan if they retire or leave? You can learn a lot just by listening.”

Eliminate excess and conserve cash
“When you’re expanding quickly or you’re having supply chain issues, you respond instantly instead of strategically,” Dorr said. “Recession is good in that it gets rid of competitors that are marginal and forces businesses to look inward. The positive thing that comes out is the elimination of inefficiency and overindulgence. Small- and medium-sized businesses are in a better position to respond quickly and look for opportunities for cost-cutting measures, but they need a plan in place in the near term or those excesses will reduce profitability as inflation cuts into your bottom line.”

Seitz recommends three ways businesses can conserve cash in a recession:
“First, reduce exposure by tightening any credit offered to customers and firmly collecting any payments due,” she said. “Second, closely and regularly monitor costs of goods sold and inventory carrying costs. Look for signs your prices should be increased and act quickly. And third, evaluate opportunities to make acquisitions at year end to lock in favorable pricing and interest rates or to capture tax advantages.”

To make and implement a plan that will accomplish these goals, Dorr emphasized knowing your key performance indicators.

“Small businesses often don’t think about how they know whether it was a good day or bad day,” he said. “Each business has its own measures. As a business owner or manager, know what measure reflects how your business is performing day to day, such as labor-to-sales ratios, how much you have in the bank, what’s your cash inflow versus outflow. How do I set up expectations, and how do I measure against those expectations?”

A lot of change and further unpredictability are expected in 2023.

However, Seitz said, “business owners should remember that they are not alone in facing these challenges. Whatcom County businesses can connect with a WWU SBDC business adviser for confidential conversations about these and many more strategies, at no cost to the business.”

Methodworks Consulting, Tom Dorr and Associates and Waycross Investment Management also are among the many firms available in the area to help businesses adequately plan and prepare with confidence for the ever-evolving year ahead.