Canadian businesses are undergoing another period of economic uncertainty. According to the Bank of Canada’s most recent Business Outlook Survey, nearly one third of respondents expect a recession in the coming year. In the last two surveys, that number was only 15%. Respondents expressed growing concerns around the ongoing trade conflict and risks to consumer spending.
Economic worries can lead to operational challenges and potential financial deterioration for companies. These include rising input costs, inflation, changing regulations, tariffs, market stagnation, tightening credit conditions, and being overleveraged when sales decline or interest rates rise. Insufficient anticipation of the potential impacts and adapting to these factors can make the situation worse.
Address market disruptions, operational challenges, and financial stress
Companies should not brush aside operational or financial stress. The worst thing a business can do is to ignore the problem.
There are many steps businesses can take to navigate economic volatility and uncertainty. This can include being adaptive to market changes, executing a defensive strategy, or a performance improvement plan. Reducing costs in the short or long term is another approach, and can be achieved in a variety of ways, including by finding alternative suppliers, reformulating how they deliver a service or manufacture a product, or potentially conducting a 80/20 analysis.
An 80/20 analysis will help identify which customers and products/services are driving the most profitability and are the most valuable to the business. Protecting core customers and contracts, even at the expense of short-term margins, can be crucial to weathering downturns.
Companies that ignore challenges or leading indicators can experience value erosion.
Some of the main dangers include:
- Declining profitability
- Loss of stakeholder confidence
- Reduced access to capital
- Potential insolvency
- Cash flow constraints
- Difficulty servicing loans
- Missed strategic opportunities
- Being unprepared for future disruptions
Value preservation and turning challenges into opportunities
There are many strategies businesses can implement to preserve and create value. Some of the steps include improving transparency in financial performance and streamlining operational processes for greater efficiency; building resilience into their cost structures; identifying underperforming assets, reassessing strategic priorities, making disciplined decisions regarding capital allocation; and preparing contingency plans for how to shrink the business should results keep deteriorating.
When a company is dealing with uncertainty and market challenges or expects to face turmoil in the future, it’s the time to act and innovate.
A company can do this by performing an operational and strategic review of the business, especially before it becomes too stressed. “Several companies are using the current market disruptions as a chance to spur further change and innovation, including exploring opportunities to leverage automation and AI to transform, improve performance and future-proof their businesses,” he adds.
Doing so can help provide a springboard for the next stage of renewal and growth of your business. And having a clear game plan with contingency options is essential for navigating financial challenges successfully.
It’s also important to work with stakeholders. Effective communication and relationship management with lenders and other stakeholders are critical, particularly as banks tend to tighten credit when signs of economic stress appear.
Openly discussing problems and how they will be addressed with lenders is likely going to give management more credibility versus one that does nothing. Poor management or a lack of transparency can accelerate a shift from financial stress to distress.
How we can help
Our Strategy, Value Creation & Analytics team works with businesses to help improve or turn around their performance, develop or revitalize their growth plan, undertake and integrate acquisitions, or arrange for a possible sale. We have an owner’s mindset and use a hands-on approach to serve clients undergoing critical and urgent situations. We uncover areas for improvement and execute strategies to help them achieve their goals.
Our Business Restructuring & Turnaround Services team works with businesses of all sizes to resolve their financial and operational challenges. We can create a strategic plan to restructure your company while improving financial performance and enhancing value. Find out how we can help your business.