Talking to business leaders, their frustrations are clear. In the game of business snakes and ladders, no sooner had their organisations climbed up the ladder to recovery than many found themselves sliding down the snake once again.
So how to stabilise and move forward again? This is a markedly different, considerably more uncertain, business environment to the one we’ve faced over the pandemic. The recovery was already having an inflationary impact as demand for talent and materials escalated. The war in Ukraine, sanctions and trade embargoes have exacerbated supply chain disruption and fuelled further rises in energy, transport and agricultural prices.
As inflation climbs upwards, it’s increasing borrowing costs, squeezing household budgets and eroding the business and consumer confidence that had built up during the latter part of 2021.
The winding down of government support
The ‘hunker down and wait for the upturn’ approach may seem tempting. After all, most businesses came through the pandemic in reasonably good shape. But that was with the cushion of furlough payments and bounce-back loans. That support is no longer available. And the pressures on liquidity have been compounded by the end of rental holidays and the need to repay the debts accumulated during the lockdowns.
We’re already seeing a renewed rise in insolvencies as a result. Finance is also more expensive and harder to secure. For example, some of the refinancing arrangements that would have been readily available three months ago are now being closed to all but the most financially secure firms.
Rather than battening down the hatches, this is the time to take prompt and proactive action in averting risks, shoring up finances and stabilising operations.
Keeping pace with changing demands
The need to act now is heightened by the changing demands within an economy being reshaped by digital transformation and stakeholder expectations on environmental, social and governance (ESG) issues.
Yes, some capital programmes may need to be reined in or postponed. But your business still needs to remain innovative and relevant. Critical investment and change need to be sustained. Accelerating digitisation is set to play a key part in both engaging with customers and remaining cost competitive. In turn, our Act Now: From recovery to growth research shows that businesses' ability to attract talent and secure credit and institutional investment are increasingly dependent on your progress on ESG.
With budgets tight, it’s paramount to both identify and focus investment on areas of the business with the greatest potential in today’s changing economy.
It’s also important to release and raise funds by scaling back or divesting non-core activities.
Act now to recover
The financial, operational and investment priorities I’ve touched on here lie at the heart of Act Now to Recover mindset and methodology. Some areas of focus are core as you look to improve visibility and control of your business. But others are specific to the current environment in areas such as financing and supply chain options.
And rather than just being relevant to firms facing immediate stress, these restructuring fundamentals have a valuable role to play in currently well-performing businesses. This includes helping them to identify potential vulnerabilities, refocus resources on high potential operations and strengthen their ability to mobilise in the face of uncertainty.
We see that there are four key areas where businesses can focus their priorities to help them weather the economic storms ahead. These are: liquidity and cash; operations; restructuring the business portfolio; and corporate deleveraging.
With the vulnerability to shocks and market swings increasing, liquidity is everything. Operational plans need to be funded, bills have to be paid and credit repayments maintained. This means a laser-like focus on liquidity, including the optimisation of working capital and identification of locked-in cash, while exploring all possible internal and external sources of finance.
The key is being able to understand how all the different cash drivers fit together, from sourcing costs to fluctuating revenues. Many people make decisions that affect the cash position, so it’s important to involve the right people and build the analysis from the bottom-up, rather than simply leaving this to finance.
Cash flow forecasting is a critical part of this – educated guesses aren’t enough. This includes 13-week projections and forecasts based on solid inputs from the business not just the finance team and that include a range of best- and worst-case scenarios. Do you have the reserves to deal with any further spikes in energy and material costs, for example? How could continuing increases in salaries and other fixed costs affect your financial position?
In the face of rising costs and continued supply chain disruption, organisations need confidence that they can sustain operations and meet customer demands. That means being able to flex output up and down in line with movements in demand, while controlling fixed overheads such as salaries.
Options include both new sourcing arrangements and greater use of contingent talent. But engaging with new partners and putting arrangements in place can take time, so steps need to be underway now, rather than waiting until costs spike or supplies dry up.
Once you have a clear view about what operations are or aren’t viable in the changing environment and how much room for manoeuvre you have from a funding and work capital perspective, you can step up divestment of non-core areas of your business. You can also look to acquire the key skills needed to sustain relevance and bolster resilience.
With private equity still sitting on ample dry powder, deal activity is still strong. But appetite could wane, and prices fall if the current economic situation becomes prolonged. It’s therefore important to get the identification and marketing of assets for sale underway as soon as possible.
With debt costs rising and finance harder won, it’s time to be more rigorous and proactive in freeing up funds and clearing excess debt from the balance sheet. An important part of this is reaching out to creditors, explaining your position and plans, and securing their continued support. It’s also important to explore the full range of financing options including private credit and private equity investment.
Coming through stronger
Applying these restructuring fundamentals can deliver vital resilience, impetus and strategic clarity, while improving your ability to sustain investment and respond with speed and agility as market conditions improve.
If you would like to discuss any of the issues raised in this article or find out how a restructuring mindset and methodology could help give your business a decisive edge, please feel free to get in touch.
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