The Impact of Tough Market Conditions on Businesses and Their Finance Teams

The current market conditions are putting a lot of pressure on businesses. Inflation is causing prices to rise, interest rates are increasing, the economy is in a downturn, and salaries are growing. This is making it difficult for businesses to maintain profitability, and finance teams are having to work harder than ever to keep things afloat.

Margin squeeze

Margin analysis and maintenance are critical for businesses in this environment. Inflation, supplier prices, business costs, wage increases and cost increases that cannot be passed on to customers all add up to a significant margin squeeze. This puts downward pressure on profits for businesses, making it harder to stay competitive.

Finance teams will need to be especially mindful of preserving margins when partnering with the business to make decisions. This requires a more detailed analysis of each cost and a thorough understanding of the company’s internal and external environment. Regular margin analysis, reforecasting and modelling of potential scenarios are essential for identifying risks and managing outcomes, especially when it comes to additional uncertainty around foreign exchange rates and rising energy costs.

Chris Tredwell from Accounting / Postmodern ERP Solution Aqilla states: “The serious problem for next year comes from inflationary pressures, causing rises in food, fuel, energy, and resources. For businesses and individuals, the cost of living and operating will go up. Although salaries will rise accordingly, all those things must be accounted for so we will need to keep a much closer eye on what’s coming in, and what’s going out. Looking at the accounting space, it’s imperative that systems can cope with those changes, and monitor gross margins, month-on-month profitability costs and overheads. Having a decent analytical reporting system is essential in identifying heat graphs to show where changes are happening and make early interventions when necessary. 

The management of all this will, unfortunately, lead to an increase in workloads but it’s imperative that it is done. We have seen the consequences if you don’t: things can get out of control very quickly — just look at Stripe, Amazon, Meta, and Twitter. It’s not just important to have a good business, you’ve got to run a good business. And that’s all down to accounting and finance – it’s tracking all the different activities, so you don’t suddenly discover big holes in your finances.  

But ultimately, who knows what will happen next year?! We didn’t know there was going to be a war in Ukraine, and we didn’t see the energy crisis coming. So, there are a lot of unknowns as we head into 2023…”

Cash flow forecasting

Cash flow forecasting is becoming increasingly important in this environment due to the need to be able to predict how cash will move throughout the business. Systems linked into finance systems can help automatically update cash flow forecasts, but it may still be challenging with multiple entities on different systems. Businesses will need to ensure they have up-to-date and accurate information to make the best decisions for their company.

Borrowing costs are increasing, making debt more expensive for businesses. This can be particularly challenging in an environment of declining consumer spending, as companies may struggle to generate surplus funds to meet financing obligations and repay debt facilities.

Generate investor returns

Businesses must focus on generating investor returns, even in a tough environment. This requires careful financial decision making and creative approaches to cost management and revenue generation. Companies should look for ways to optimize process efficiencies and reduce costs while still delivering the best possible services or products to customers.

Finance leaders will need to develop trusted relationships and maintain ongoing dialogue with their shareholders, investors and lenders to ensure they are aware of the current financial state of the business. It is essential that finance leaders maintain the confidence of their stakeholders so they continue to receive the required support.

Summary

Businesses are under immense pressure due to inflation, rising interest rates and economic downturn. This is putting a lot of strain on finance teams, who must work hard to ensure that the business can stay competitive in this challenging environment. Margin analysis and maintenance, cash flow forecasting and creative approaches to cost management are all essential for CFOs and their finance teams. Ultimately, the ability of businesses to survive and thrive in this environment will depend on how well they manage their finances.

What could our next steps be?

Cash may be the most pressing issue for many businesses. The key question to ask yourself: what is our worst-case scenario on cash? If everything went wrong at the same time, what would our cash position be? What would we then do in this scenario?  What is the action that we need to take in advance to minimize risks? Have you properly considered the risks and talked these through with the relevant leaders and teams?