Jeff Judy

Jeff's Thoughts - September 19, 2018

Assessing Management in a Good Economy

One of the most outstanding features of our current strong economy is the very low unemployment rate. But is this good news for everyone?

Practically full employment presents challenges for nearly all businesses, including the businesses run by your credit customers. Retaining their best employees, keeping the right people in high-skill and supervisory positions can be very difficult (as many of my readers are experiencing firsthand). On the one hand, older (and valuable) staff are retiring at an ever-increasing rate, and on the other, plenty of vacancies across most industries offer opportunities to jump ship for better pay or other incentives.

On the other end of the scale, it is just as difficult to find new workers to bring in at entry-level positions. And that can significantly hold back plans to thrive and grow. To take just one example, in my area a serious shortage of school bus drivers is not only playing havoc with school schedules, it has led several companies to offer signing bonuses of $3,000 to $5,000 (depending on experience) to drivers who switch employers.

What does this all mean for credit relationships? Good analysis and good loan structure are built around not only understanding the challenges faced by your customer's industry, but on assessing how the management teams in those customers respond to these challenges.

At this point, labor shortages and turnover are so ubiquitous that I recommend you ask yourself the following questions about every credit customer:

  1. Does this customer depend on steady or increased staffing to be successful?
  2. Does management explicitly recognize the labor challenge? Be wary of customers who project growth, perhaps aggressive growth in this economy, and who only mention the labor question as an afterthought, if at all.
  3. Is management realistic about the timelines for filling positions? In this economy, staffing up to support a new product, delivery point, or market is simply going to take longer than it would if there were less competition for workers.
  4. Is management realistic about labor costs? The hiring bonuses mentioned above are a case in point. Competition for employees means higher salaries and better benefits, if you hire people with the skills you need. And it means a higher investment in training if you have to higher less-experienced staff and grow them into their responsibilities.
  5. Does management have explicit strategies for dealing with these costs? Are they going all out to hire (expensive) employees ready to hit the ground running? Are they committed to training, with its associated costs in time and money, to develop skills that are hard to hire? Can they use tools like automation or outsourcing to enhance productivity and reduce the need for additional employees?
Think of the labor shortage as a stress test for company management. A thorough discussion of this topic with your customers can be very revealing about how they plan to manage difficulties presented by the current economy.