We must, as governments around the world increasingly tell us, learn to live with COVID-19. Many small and midmarket businesses, though, are wondering what this really means.
Governments around the world, including several in Asia, Europe, North America, and the Middle East, stepped in and opened up various relief programs to businesses to soften the blow of the pandemic, with a view to protecting their own, as well as the global, economy. Programs consisted of government-backed loans as well as payments to cover a significant portion of the payroll costs for millions of businesses worldwide.
These programs have been expensive but, by and large, successful. For example, in Canada, as well as in many countries around the world, the number of bankruptcies during 2020 and 2021 was lower than before the start of the pandemic.
As of October 2021, the government relief programs in Canada largely came to an end. As businesses are no longer receiving payments from these programs, companies are again on their own in their post-COVID-19 recovery, and they face a daunting outlook. Hopes of a strong recovery as a result of the relaxation of health mandates have long faded with the recurring variants of the virus, but few predicted the post-pandemic challenges businesses around the globe are facing. These include labour shortages, local and global supply chain disruptions, and, most recently, soaring energy costs and rising interest rates. The proverbial perfect storm.
In June, for a third consecutive time, the Bank of Canada raised interest rates. And while rates remain historically low, the rises—and increases in inflation—are expected to continue.
Creating the financial model
Businesses, as has always been the case, will need to grow profits and contain costs. Unfortunately, the ability to thrive, and perhaps even to survive, is becoming more difficult in the present environment. Now more than ever companies need to be flexible enough to respond quickly and effectively to these ongoing changes. This translates to anticipating increasing costs for materials, higher interest rates, supply chain interruptions, government sanctions within the geographies in which they operate, and a number of other variables that fate may throw at them. If the last few years have taught us anything, it is that the world is unpredictable and timely responses are crucial.
To do that successfully, businesses need to ensure that critical information is timely and readily available and that they master the ability to analyze that information. Financial information can, and should, be used to prepare projections, taking into account different scenarios.
There are both internal and external reasons to continually prepare and review projections. Externally, this information is likely to prove critical for a company’s lenders and other stakeholders. In an uncertain economic environment and when businesses are having to pay back COVID-era loans, lenders will be more active in monitoring the results of their customers rather than providing more support. Seeing evidence of reliable reporting and financial forecasting will demonstrate that the business is under control and will provide much-needed reassurance to lenders. It will also assist businesses to make more compelling cases for additional financing if additional funds are required.
Internally, projections allow management to take steps before things come to a head. Management’s recognition that actions are required to maintain liquidity will often result in the identification of redundant assets that can be sold, expenses that can be reduced, etc. Taking proactive steps is often the course of action that allows management to remain in charge of the company’s destiny rather than have its lenders impose their demands in order for their financial support to continue. The projections also provide management with fresh opportunities to consider alternative funding sources when traditional lenders are increasingly cautious but when private markets, including private equity, have a significant amount of capital on the sidelines ready to be put to use.
The full set of skills
Even without external pressures from creditors, there are compelling reasons for businesses to start taking their financial systems and modelling seriously. Failure to make sure these items are top-notch or a high priority can result in a business failing even when economic conditions are favourable. Every accountant has stories of enterprises that fell into difficulties while seemingly thriving—growing revenue without profit, unknowingly selling products at a loss and running into cash flow problems. Poor visibility into finances and a lack of forecasting can result in crises coming unexpectedly.
In an unpredictable and fast-changing environment, an increasing number of businesses will not just run unwitting risks; they will miss out on opportunities that are before them. The past couple of years have made both suppliers and customers question their fundamental business assumptions. How, for example, has the increasing globalization of supply chains changed their assumptions? The opportunities such changes present can only be properly evaluated and exploited when a clear view of the company’s costs and requirements is available.
Put simply, middle market business owners and leaders could, in the past, often succeed by relying on their sales skills or perhaps the quality or efficiency of their manufacturing process. In effect, some made money in spite of themselves. However, with today’s fast rate of change, this will no longer be possible. Leaders need to ensure that their team considers all aspects of the business. This includes enhancing processes for sales generation, improving the management of supply lines, and dealing with labour shortages or managing other operational challenges. They can only achieve this by utilizing the best information available. Central to this is the finance function which should tie the different areas of the business together and provide solid information from which to determine priorities and strategies.
Many businesses may not have all the in-house skills needed for this endeavour. Given current labour shortages, that is unsurprising. In such cases, it is essential that where they are operating without crucial skills in-house, business leaders turn to their trusted business advisors.
In short, at times of turbulence in economies, markets, and the world, businesses cannot afford to be flying by the seat of their pants.