Just as the world is starting to move past the pandemic, the financial outlook has changed drastically. We're still in a unique time—high inflation, volatile equity markets, a rising interest rate environment, and the ongoing war in Ukraine. Many companies enjoyed high profits and a booming business throughout the pandemic—especially those like Netflix, Peloton, Zoom, and Instacart as consumers had to find ways to entertain themselves at home. That has now changed for technology companies and the private equity firms who have large investments with them.
Lockdowns, soaring valuations, and scaling too quickly
According to the Canadian Internet Use Survey in 2021, 75% of Canadians aged 15 and older participated in internet-related activities. It's no surprise that companies offering services that people could enjoy while confined to their home gained popularity. And that sent their valuations soaring. Since lockdowns lifted, there has been a sharp decline in pandemic-driven success stories as people started to move about their lives outside of the home. Small, medium, or large—companies may find themselves in much different financial circumstances as compared to the past two years.
Inflation has steadily increased, hitting 7% as of August 2022—a figure not seen since 1983. Intense consumer demand and supply chain disruptions are some of the core factors contributing to higher prices, according to Statistics Canada. Further, 47% of Canadians said they bought discounted items and 45% have deferred making a purchase due to rising prices.
Some companies scaled up too much, too quickly. In an inflationary environment, it's important to be elastic—which is problematic for many, if not impossible for most. For example, in the oil and gas industry, supply and demand are so closely matched, even a small deviation can send prices skyrocketing. If oil prices go up, consumers are not necessarily going to stop driving to work. They will absorb the pain at the pump and cut spending in other areas. On the other hand, with other areas like online streaming, the market is more saturated, and consumers have choice.
The rate of growth wasn't sustainable and now we're coming back to a norm. If this describes your situation, then it's time to make adjustments.
Adapting to now and the future
- It's more important than ever for businesses to captivate their current audience. While many companies have and are losing customers, there's still a strong customer base that needs to be served. How much of that customer base can you continue to maintain? It's important to work out a plan for how you can continue to serve your customers—persuading them to stick around.
- It's time to do a diagnostic and evaluate where the business financials currently stand. Are you able to demonstrate your value and increase prices, if necessary? Retaining your customer base, repositioning yourself, and helping customers understand the price increase are all vital to moving the business forward.
- Focus on the main goals for the business. If the goal is to continue expanding, then it might make sense to move forward with expansion plans. You need to evaluate the cost to ensure it also works from a financial standpoint as well. Rather than expanding, consider focusing on your strongest areas of business and shelve the growth plan for the future.
- Businesses can also forecast out their business for short-, medium-, and long-term horizons. What is the outlook for the next 12-24 months? What direction should you go in? Perhaps the most important thing you can do is look back on the past two years, understand what happened with the business, and why. Then you can learn how to avoid the same issues in the future.
You may be overwhelmed and not sure where to start. BDO advisors can work with you to develop a number of strategies, including the following.
- Consider adjusting your capital structure. There are options including senior, mezzanine, or convertible debt, preferred and common equity, as well as government loans and grants. Then you can adjust your capital structure allowing you to manage cost fluctuations, but you'll still have the funds to operate and expand if desired.
- Perform a business assessment to evaluate the strength and cash flow of your business. Find areas where you can avoid declining profit margins, improve financials, and expand if it makes sense for your business.
- Conduct an 80/20 optimization of your business to include customers, pricing, and products or services. Usually, 80% of the business profit comes from about 20% of the customers and products. Review the data and investigate which customers or products drive in the most money. Does it make sense to phase out certain products or re-evaluate customers that result in little to no profit?
- Operational management can also help maximize the performance of the business while improving efficiencies. Employing measurement systems, including performance and success metrics can help boost the outlook. Our professionals can complete targeted evaluations of the current operation and leverage technology where appropriate.
- Many of the companies experiencing decreased revenues will need to reevaluate their growth plans. As consumer behaviors have changed significantly, businesses may need to consider pursuing new geographies, new product lines, M&A, and other avenues to create opportunity for top line growth again.
Contact us to learn more
Matthew Marchand, Partner and Senior Vice-President, Business Restructuring & Turnaround Services
Daniel Ma, Partner, Valuations & Modelling
Charlotte Zhen, Senior Manager, Value Creation and Analytics