As businesses and households face up to a rapidly changing economic situation, a review of the fundamentals is important, to ensure as far as possible, that the impact of the current economic challenges can be managed.
A new Government, rising living costs, increasing interest rates, labour and materials shortages, upward pressure on wages and rocketing freight costs, coupled with supply chain issues, are putting business and households under enormous pressure.
From a business perspective, as we start looking towards likely budgeted results for the ensuing year, it’s now important to take stock and have a close look at how changing circumstances may affect operations and financial outcomes for the 2022/23 financial year and beyond.
We suggest the following six step process to “stress test” financial forecasts and budgets for the 2022/23 financial year:
- Review budget assumptions - Many business forecasts and budgets have been prepared back in March, April and May, for presentation to Boards and Management. With the unexpected inflation outbreak, rising power and gas costs, continued supply chain difficulties, interest rate hikes and households under increasing financial pressure, assumptions in relation to cost levels, pricing and the cost of business financing, may now be out of date. It may be prudent to take another look and also to consider alternate scenarios under “best, middle and worst case” outcomes for sales, profits and cash flow.
- Review financing arrangements - In a rising interest rate environment, new money will cost more and existing arrangements which are due for rollover or review/renegotiation will also come at a higher cost. Funding requirements should be reviewed and early discussions had with funders is critical to keep abreast of any changes in lending criteria or other “sensitivities” which may impact business borrowing capacity and the cost of funds.
- Pricing strategies - Underpinning business revenue targets are product and pricing strategies. All businesses need to be clear about ensuring that product pricing takes account of increased business costs in order to protect profit margins, whilst simultaneously assessing likely changes in customers’ financial circumstances and likely changes in spending behaviour, as a result of business and household cost pressures. Price points and value assessments are likely to be “front and centre” in customers’ minds.
- Capex budgets - Capital expenditure for the year ahead, which has been planned over recent months, should be reviewed as to necessity, cost and likely lead times, in view of recent economic and geopolitical events. Again, source and cost of funding Capex should be reviewed to ensure that any changes to lending criteria and cost of funds is known and accounted for in forecasts and budgets.
- Credit management - As economic circumstances change and money becomes more expensive, credit management takes on increased importance. With B2B transactions credit reference checking, robust credit level processes, active accounts receivable management and swift follow up of slow payers is essential. Your exposure to amounts owed by customers should also be protected via the Personal Property Securities Register (PPSR), whereby you become a secured creditor on your customer’s books. This affords a level of protection in the worst circumstances. Consideration can also be given, particularly with larger accounts,to credit insurance.
- Secure key staff - In changing times, we need to be more dynamic in our decision making as new challenges and opportunities arise. The trusted and long serving members of our team who know our business well and understand the intricacies of our structure and operations become vitally important in navigating “choppy waters”. Ensure that your key personnel are aware of the likely challenges ahead and that they are committed to supporting the business as required.
Over coming months, business owners will need to work very closely with management teams to ensure that the changing economic and business landscape is under constant review and assessment.
Please contact your usual hmh advisor on +61 3 9840 2200 if you have any queries at all in relation to anything mentioned previously.