The Pulse on Strength Amid Uncertainty
As part of a series that explores how companies can pursue strength amid uncertainty, experts across Riveron observe the top challenges businesses currently face and provide considerations for addressing those challenges.
Economic uncertainty is driven by everything from inflation to geopolitical and supply chain disruption to human capital concerns. Survey data from a recent Riveron virtual event indicates that company leaders foresee the rising cost of labor combined with employee turnover as the top business challenge for the year ahead. In addition, economic uncertainty is perceived as one of the top barriers to realizing successful inorganic growth in 2023. Amid these myriad concerns, companies everywhere are grappling with how to balance proactive cost and cash measures while realizing the potential for growth. Here are related business and industry perspectives for leaders seeking to strategically address today’s volatile economic climate:
Understanding today’s disruptive trends—and what companies should do about them
Riveron experts across accounting, finance, technology, and operations share the disruptive trends they’ve recently observed and what companies can do to chart a resilient course forward.
Consider divestitures or strategic acquisitions amid capital constraints
“Rapidly shifting demand trends combined with tightening credit markets are creating financing challenges for companies. New capital can be difficult or expensive to raise, while existing lender agreements may involve challenging covenants that once seemed achievable.
Market uncertainty creates opportunities for nimble management teams to position their companies for future success. Using this time to enhance a company’s portfolio by divesting underperforming or non-core assets can provide cash flow in a time of need. Alternatively, companies with strong balance sheets can fortify their market positions by identifying and acquiring new, potentially distressed, assets.”
Riveron recently surveyed corporate development leaders and found that mergers and acquisitions (M&A) deals and divestitures are both likely to increase in 2023. Plus, culture plays a key role in post-M&A success.
Read related findings in this report: Corporate Development’s 2023 Deal Outlook
Anticipate ways technology can enhance post-acquisition strength
“Going into the next 18-24 months, companies will need to focus on limiting the dilution of profitability and shareholder value. Particularly in the private equity (PE) space, there has been a deluge of acquisitions over the last 24 months, so being able to capture that value over the next two years will be critical to set up each PE portfolio for long-term success.
While many companies anticipate a resizing of human capital to retain profitability metrics, there are other levers that should be considered. These levers can include right-sizing the technology landscape, adopting applied artificial intelligence (AI) technologies, and continually driving visibility on the value of technology adoption—showing how it enables the organization beyond keeping the lights on.”
For technology-enabled success, two Riveron experts share related considerations. Read more: Private Equity Teams Can Boost Value and Visibility Through FP&A Automation
Optimize costs using an integrated assessment approach
“Economic volatility alongside the Fed’s continued rate hikes are causing many leaders today to pivot their focus from sustaining revenue to protecting earnings. The situation calls for a deliberate, sustainable approach to optimizing costs—thinking beyond sales, general, and administrative (SG&A) expenses—while maintaining the capabilities that differentiate an organization and aid its growth.
Companies should use an integrated approach to optimize costs by assessing the cost of goods sold, working capital, and SG&A together. This will offer a comprehensive understanding of the current cost base, informing decisions while keeping strategic plans for growth in mind.”
Related insights for finance and operations leaders : The Critical Path for Margins: Optimizing Costs While Balancing Revenue Uncertainty
Contend with inventory instability through careful planning and cash flow strategies
“Across industries, increasing levels of inventory commitments—on hand, on water, and on order—are causing significant challenges to companies’ liquidity. This is happening as the declines in orders and headlines detailing retailers’ own inventory struggles are combined with market uncertainty around the recession and consumer activity—or lack thereof. Higher inventory commitments increasingly tie up cash balances in vendor payables, freight and storage costs, etc., putting pressure on the need to borrow while the cost to borrow is steadily increasing and valuation trends are declining.
Management must have a detailed, forward-looking cash flow and demand plan projection to ensure flexibility. We recommend a thirteen-week cash flow budget tied to the P&L, reviewed weekly, to immediately appreciate timing or trend changes and monitor and respond to any risks in their infancy. Understanding where the company’s budget can flex requires this detailed view of a company’s core products, appreciating what drives cash versus profitability. For instance, some products or channels may have higher profitability but have a comparatively prolonged cash conversion cycle. A detailed view also reveals where expenses can be quickly cut, if needed, to support revenue declines.”
Respond to the ups and downs of consumer demand through agile planning
“In many settings, consumer demand and spending patterns have changed due to past pandemic-related surges and ongoing economic uncertainty. In supporting a company’s sales and operations planning (S&OP) function, forecasting consumer demand across various levels of its portfolio has been difficult, given these changes.
Forecasting consumer demand will never be 100% perfect. Therefore, developing a robust and agile supply chain network becomes critical in ensuring that there are ample materials—such as a beverage producer needing glass, corks, or labels to support the supply of its finished products. It is also critical that this supply can be quickly allocated to support fluctuations in customer demand. It becomes important to enhance reporting and visibility into both production plans and the procurement network, incorporate inputs from key suppliers, and manage supplier relationships based on specific service-level agreements (SLAs).”
Address labor constraints and strengthen accounting and finance teams
Attracting and retaining talent is a persistent concern for companies, particularly for finance, accounting, and other roles that ladder up to the office of the CFO.
In an article on labor constraints among accounting and finance professionals, Riveron’s Drew Niehaus writes, “Corporate accountants have been tasked with challenging new types of work, from reassessing the value of assets that may need to be impaired to determining how supply chain disruptions impact financial statements. Similarly, the rise of private equity has resulted in a sharp increase in complex transactions that reflect new approaches to deal making, financing, agreements, and accounting.”
Read the full article: Five Steps to Attracting Tomorrow’s Accounting Professionals
Mobilize strong controls to guard against the mounting pressures that enable fraud
“The overall economic uncertainty impacts many industries, including disrupting technology sector stakeholders and employees—many of whom have never faced a shrinking job market—and challenging manufacturing companies as they incorporate ever-creeping inflation into their pricing strategies going forward. These disruptions make it even more important for management to maintain strong internal controls and look at the fraud triangle (factors contributing to the likelihood of fraudulent activity).
In times of economic volatility, companies may face more perceived pressure or feel more justified to rationalize fraud. This makes it even more critical that each company’s management and board remain vigilant in ensuring that perceived opportunities do not turn into committing deceptive or inappropriate practices.”
Improving performance as new industry patterns evolve
From healthcare to retail and beyond, experts observe that disruption is prevalent across industries, making it essential to adapt to changing nuances and optimize performance accordingly.
In healthcare, proactively monitor contract-based incentives and modify tactics for success
“One area of uncertainty for healthcare companies is value-based managed care contracts and the measurement of success of those contracts. There are metrics in place that, if not monitored diligently, can cause the healthcare organization to lose the opportunity for incentive payments, which is the enticement in making these arrangements.
Healthcare organizations should not wait for the last quarter of a contract to ‘sprint’ to meet the metrics within the contract. It is beneficial to come up with a plan at the onset of the contract and track the metrics diligently throughout the contract. Even if an organization does not meet its metrics for the incentive payments during the first year, leaders can conduct a root cause analysis to determine why the organization did not meet the metrics outlined in the contract and devise a plan to fix the issues. This is a process that evolves as each contract will likely have different metrics and targets to qualify for the incentives.”
In retail, accurately understand costs and find flexible ways to address them
“Retailers are going to be hit hard during the holiday season by a number of factors, most notably inventory, inflation, and consumer confidence. Inventory levels and mix are still way out of line with consumer expectations. Inflation has driven up operating costs while driving down consumer confidence. Lingering behind all of this is an expectation that lenders will be reducing advance rates, further squeezing retailers.
To remain strong in uncertainty, stick to the basics. This means each business should understand its costs, margins, and revenue build. Retailers need to remain very flexible to react to an ever-changing cost landscape.”