Opportunity favors the prepared

McDonagh

By Keith McDonagh
Head of the Institutional Solutions businesses for Massachusetts Mutual Life Insurance Co. (MassMutual).
Posted on Mar 13, 2020

President Abraham Lincoln, who shepherded the United States through its darkest days, understood the importance of preparation. “Give me six hours to chop down a tree,” Lincoln mused, “and I will spend the first four sharpening the axe.”

This advice is equally relevant whether seeking to address a significant challenge or whether to benefit from a great opportunity.

When I first shared the following thoughts last July, we were in the midst of an accelerating bull market and increasing economic optimism and confidence. Just nine months later, we have economic stress and unfavorable market conditions, while taking bold national actions to stem the COVID-19 outbreak.

For those who lead businesses, it’s always a good time to sharpen your financial positions. CEOs, CFOs, CIOs and others who occupy the “C Suite” need to prepare for all market environments, especially in increasingly uncertain and volatile times. Business leaders are encouraged to review their company’s finances and shore up their ability to weather storms.

Preparation not only helps overcome bad times, it enables leaders to recognize and capitalize on opportunities as they arise, seizing growth initiatives as others head for safe harbors or the exits.

The extended bull market has officially ended, and concerns of a recession loom. Interest rates, which had already been relatively low by historic standards, have declined even further.

No one has a crystal ball to predict with any exactitude what is on the horizon. While you can’t predict, you can help prepare by considering these five strategic actions:

  • Review your company’s balance sheet and income statement flexibility . Make sure you’re deploying capital as efficiently as possible. What risks would your company face, for example, if the economy slid into recession and orders for new products or services declined by 10 percent, 20 percent, or more? If your company suffers a revenue shortfall, will it be able to make good on its own obligations?
  • Ensure assets are well-matched to liabilities . Mismatched durations of investments to liabilities can cause financial shortfalls just when a company needs greater liquidity or feels more pressure on its balance sheet. Investment and risk managers should evaluate their goals, whether they are to seek returns, reduce volatility, achieve certainty, or some combination.
  • Reduce volatility associated with benefits costs. Benefit costs such as pension funding, disability insurance and workers’ compensation tend to spike in recessions. Does your company have a strategy to help smooth out or address rising benefit costs? Meanwhile, market volatility can disrupt workers’ plans for retirement. Workers who remain on the job because they are financially unprepared to retire at their traditional retirement age can cost more in terms of both salaries and benefits.
  • Evaluate your retirement plan’s investment options. Whether your company offers a defined contribution plan such as a 401(k), defined benefit pension plan, or both, investments drive performance. A market downturn could hurt funding levels, delaying retirement for your employees and driving up liabilities for your enterprise. Having the right investment options can provide additional stability and help protect assets in volatile markets.
  • Place a premium on experience. Complicated times demand a steady, experienced partner that has weathered many a storm. Since it was established in 1861, MassMutual has stood by its customers through wars, depressions, recessions, market crashes and many other financial calamities and challenges. We’ve stood the test of time by applying our risk management capabilities and financial experience to help customers prepare for the worst and take advantage of opportunities.

Taking these steps to re-evaluate your company’s financial risk management strategy may be the first step towards helping to strengthen your balance sheet, manage your income streams and reduce your overall risk exposure.

Like Lincoln’s axe, it takes a sharp edge and a focused approach to successfully prepare for good and bad times.

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This article was originally published in July, 2019. It has been updated.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.