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Persistent inflation, rising prices and other key macroeconomic factors are causing businesses to brace for an impact, as experts predict the US economy will enter at least a mild recession through early 2023.
Companies are considering workforce cuts as a way to potentially trim costs or restructure businesses ahead of a weaker economic period — recent reports revealed that banks such as USAA downsized their banking division, for example, while a players with big names in technology such as as Amazon, Peloton and social media platform Meta have cut staff or imposed hiring freezes.
However, while maintaining one’s cash flow and minimizing cash burn is critical for companies facing such economic pressures, workforce reductions are often “wise and pound” for firms looking to achieve savings, Matt . ArmaniCEO and partner of accounting and consulting firm Armanino LLP said in an interview.
Many companies are aiming to reduce their workforce ahead of the next recession – 80% of hybrid working and full-staff companies, respectively, declared their intentions to lay off staff during the economic downturn according to a study released Thursday by the independent platform Fiverr.
Still, the ever-higher costs of hiring, training and retaining new workers make “reducing the workforce a very, very expensive way to try and find savings,” Armanino said.
“Our advice to businesses is to apply a lot of foresight before cutting the workforce,” he said, noting that cutting workers now only to hire them back later after this potential recession — which may not life too deep or too long – I can provide expenses for companies as they work to rehire and rebuild.
The country’s economy shrank for two consecutive quarters, shrinking by 0.9% in the second quarter after a 1.9% drop in the first three months of the year, meeting the informal definition of a recession.
Experts, while predicting a slide in such a period, remain divided on how long a recession will last, theorizing anywhere from the entire next year to just a few months.
As well as rising prices and ongoing supply chain issues, businesses are also currently facing battles for top talent in a tight labor market, further putting a premium on employee retention.
Payrolls rose by 528,000 in July while the jobless rate fell to pre-pandemic levels at 3.5%, defying some recession fears but likely failing to persuade the Federal Reserve to ease planned rate hikes to meet their 2% inflation target.
Retaining top talent is therefore an increasingly high priority for businesses today, with a recent PwC report finding that 38% of business leaders identified talent acquisition as a top risk – ranking just behind security cyber, with 40% of managers agreeing that this was the number no. 1 risk their organizations face.
Nearly two-thirds of leaders have either changed or are planning to change processes to address workforce shortages, the study also found.
Taking steps to invest in technologies such as AI that can take time-consuming or repetitive processes instead of reducing the workforce can help businesses weather an economic downturn more successfully.
Investing in processes such as digital transformation “often has an immediate effect on labor costs and savings,” Armanino said. Deploying technologies like AI can help drive cost savings as well as provide a short-term return on investment for the business, he said.
“Businesses that are abandoning these initiatives because the economy is slowing are increasingly missing an opportunity, [from] our perspective”, he said.
Achieving a balance between skilled workers and investing in key technologies or tools can help firms keep costs down while maintaining their cash flow.
“I think the key is, where can human capital be used for those things that are obviously uniquely human in nature that require judgment and skill and emotion?” said Armanino. “And where are there repetitive processes that can be standardized and potentially automated? That’s really the question that businesses are looking at.”