Utilizing dynamic financial analysis to weather the economic slump
Published: November 04, 2022
Updated: November 04, 2022
Inflation is rising, and banks are set to increase rates. Canada appears to be inching towards what is being described by economists as a “mild recession.” The financial landscape for many businesses continues to be significantly affected, with an economic slump on the horizon. There are many ways companies can withstand these challenging times and continue to stay profitable or even grow. Once you understand where your organization stands, you can plan your prevention and response strategies and perform the necessary steps. Building a business strong enough to withstand tough economic times requires careful preparation.
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.
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.