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Utilizing dynamic financial analysis to weather the economic slump


The Canadian economy and business environment have proven more resilient than expected in 2023, despite larger macroeconomic headwinds and disruptive events like the wildfires in Western Canada, flooding in Atlantic Canada, and the Port of Vancouver strike. But the volatility isn’t over yet, especially as geopolitical tensions threaten to fracture the global economy.

In this environment, diligent financial planning and forecasting play a critical role in strengthening a business’s economic resilience.

The Bank of Canada’s (BoC) higher interest rate policy isn’t expected to edge down to its 2% target until at least the end of 2025. The elevated rates are working to bring down inflation, though progress to the BoC’s 2% target is slow. In projections released in October 2023, the central bank said it expects economic growth in Canada to remain subdued until the end of 2024. The Canadian economy is in contraction, and some economists expect the country to feel the impacts of a recession more strongly in 2024.

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Access to capital and capital raising is often both a priority and a challenge for business owners across all sectors and geographies—even more so during economic downturns. Yet the current and ongoing financial volatility has made banks more circumspect about their lending criteria and capital structure. Business owners are having to present a meticulously crafted and compelling business case for why their business is a worthy risk. With that, they’re expected to provide appropriate documentation, have a solid credit structure, and demonstrate positive cash flow and a strong business core.

To successfully navigate economic slumps and enhance access to capital, businesses should ensure adequate visibility into financial performance and proactively pursue opportunities for improvement through dynamic financial analysis and forecasting. Once you understand where your organization stands, you can develop proactive response strategies and financial risk mitigation plans to minimize business disruption, which will promote confidence amongst investors and lenders. Building a business strong enough to withstand tough economic times requires careful preparation.

What is dynamic financial analysis?

Dynamic financial analysis is a simulation risk model that can help organizations understand and manage their financial risks in a holistic way. Projections are used to analyze the profitability and financial stability of a company under a wide range of scenarios. This allows businesses to gain insights into how their performance may change under various economic conditions—such as changes in interest and inflation rates and through recessions—and strategize proactively.

By scrutinizing historical financial data, assessing current market conditions, and forecasting future trends, businesses can make informed decisions and adapt quickly to changing circumstances.

Three steps to strengthening your business’s financial health

While there are many ways to weather the storm, the first step is to examine your business and predict continuing financial impact. Conducting a thorough financial analysis helps the company assess its financial health, which helps create a forecast and prepare estimates.

Assessing liquidity needs in the face of a major crisis is critical. Sensitivity or 'what if' analysis in your financial modelling is necessary to project the financial requirements over the impacted period—revising cash flows, understanding the extent and timing of financial needs, possible shortfalls, and assessing the results of critical scenario testing. Models must be dynamic to accommodate the evolution of inputs and assumptions relating to revenues, expenses, trends in markets, reserves, and debt. Immediate points of focus for consideration may include:

  • Vendors and business partners: Current financial obligations and anticipated expenses (new or strained supply chain arrangements and financial effects on other areas downstream).
  • Employees and operations: Current and anticipated payroll obligations, other support payments, and operating expenses.
  • Customers: Projecting customer behaviour, needs, and new demand and reviewing where the collection of outstanding debts stands.
  • Other stakeholders: Projecting impacts on existing agreements with lenders, investors, and other stakeholders.

Understanding the internal and external financial reality is the first—and most important—step in forming adequate preparation strategies for uncertain economic conditions. Robust communication strategies across all stakeholder groups are critical in accurately understanding of the impending financial landscape. Keeping pace with the challenges and opportunities of key stakeholder groups, maintaining their confidence, and bridging the impact on your operations will strengthen your projections and improve the effectiveness of financial analysis and planning.

The next step is to know your options and assess how they fit into your business. To better understand existing cash flow availabilities or constraints, evaluating current agreements with lenders and other stakeholders is one of many immediate steps to take in planning for a financial reserve or emergency fund. Alternative strategies, such as monitoring ongoing changes to markets and economic policy, can also help your business quickly seize opportunities or anticipate and respond to threats.

Once you have assessed liquidity needs, defined projected financial requirements, and your business has formulated a preparation strategy, it's time to implement your plan. Taking steps to prevent and respond to anticipated and realized financial challenges should be a fluid process, and flexibility in times of change is necessary.

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How BDO can help

Conducting a financial analysis of your company could increase its performance. At BDO, we help our clients navigate the evolving financial market, including options available to support and sustain your operations. As your trusted advisor, it's our responsibility to guide you through the necessary actions unique to your business to continually forecast, measure, plan and respond to financial challenges. We remain committed to providing your company with the best possible support. The time to act is now.

Jesus Ballesteros
Senior Manager, Strategy, Value Creation & Analytics
[email protected]

Charlotte Zhen
Manager, Strategy, Value Creation & Analytics
[email protected]

Melissa Marino
Senior Manager, Strategy, Value Creation & Analytics
[email protected]

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