Uncertainty has been on everyone’s agenda for some time now. The persistent Brexit ambiguity put a strain on our economy with companies delaying key operational and strategic decisions. Britain’s stock market surged by £33bn on election day demonstrating how political certainty affects decision making.
Not only did businesses suffer due to the political uncertainty, but technological changes, climate change threats and shifts in consumer habits also disrupt business models and create a challenging environment for companies to navigate.
The recent outbreak of COVID-19 hit communities and businesses with unprecedented force and will continue to do so for the foreseeable mid-term future. This is the most crucial time for companies to protect themselves against uncertainty in order to not only thrive but also to survive.
Threatening unpredictable conditions can influence CEOs to implement defensive tactics such as reducing investment, cutting staff numbers, delaying entering new markets and overall avoiding critical decision making. While these actions may intuitively seem necessary to survive, they can also leave businesses inadequately positioned to benefit from the next stage of the cycle when things start to improve, which they will.
It is critical to derive a strategy that is agile and resilient. Being able to adjust the direction of travel amid internal or external changes in a dynamic way should give the company a competitive advantage. A business should as a minimum keep their financial forecasts up to date and review them regularly and sensitise these for different scenarios covering economic factors as well as organisational changes. For example, companies should forecast the potential impact COVID-19 will have on their workforce availability, supply chain and working capital requirements. A dynamic model which can be stress tested will help leaders to make appropriate decisions and shift their attention to where it is most required.
It might be tempting to reduce the head count in times of uncertainty. However, investing in existing workforce instead can help a business through tough times. Upskilling staff and moving them into more technical roles, teaching them how to use new technologies as well as providing them with greater flexibility can benefit companies in the long term. Communication is key in difficult times as some employees may choose to leave their position in fear of job security, and some may become anxious or disengaged.
In unstable times the risk tolerance of business leaders inevitably tends to decrease which can cause companies to pull back on deal making. However, uncertainty can cause sellers to become determined to exit and companies to review their strategy and divest some of their non-core assets, leading to depressed valuations.
Furthermore, strategic acquisitions can help businesses to capture market share and remain resilient in volatile times. Access to a wider customer base, additional revenue streams, human capital and synergistic savings allow companies to be agile and respond to internal and external shifts.
Above all companies must closely monitor their working capital. A depressed demand combined with customers struggling with liquidity can lead to cashflow issues. Supplier chain problems could result in companies having to pay up front to secure goods. Companies must be aware of these changes and feed results into their forecast in order to anticipate the impact of such issues in advance. The finance team should monitor customer payments, look out for any early warnings signs and make sure the default risk is as low as possible.
The COVID-19 outbreak will be a serious blow to our economy. Businesses have already been severely affected by the uncertainty surrounding Brexit and general election. It is believed that the impact will be significant but hopefully temporary and so it is important that companies do everything they can to remain resilient in this difficult time.
It is important to also recognise that the urgency instinct makes us want to take immediate action in the face of imminent danger. When what is required is systematic analysis, thought-through discussions, incremental actions and careful evaluation not just of the worst case but of the probable and best case scenario too.
Gambit Corporate Finance has a dedicated Debt Advisory team and we would be happy to speak with you if you have any concerns and wish to understand the options available including working to finalise a Covid-19 Plan, CBILS and similar applications and working with clients in communication strategies with funding partners.
Ewa Modzelewska, Manager at Gambit Corporate Finance