We are all talking about the economy in a language reminiscent of years gone by rising inflation and rising interest rates, and while it may not be the most interesting, it has a higher profile than last year.
We have been operating in that comfort zone of low inflation and low interest rates. With the recent rising costs, supply chain challenges and skills shortages, we are seeing limited experience and capability within businesses to deal with an economic cycle that is similar to that present in the 1980s.
With cash flows that are sensitive to increasing costs, a shift from 2% to 4% in interest rates may not seem significant but they have the potential to amount to a 50% increase in interest commitments. This is all happening much faster than we expected.
I was reading the Company Director Magazine from the Australian Institute of Company Directors and came across the article On Pins & Needles by Zilla Efrat. Within the article Senior Advisor in restructuring at Kroll, Stephen Parbery FAICD spoke about the interesting period we have ahead of us. He said “Directors and management will need to remain nimble, have lots of contingency plans and be prepared to adapt to changing circumstances in their business models… We are not in ‘steady as she goes’ territory, so boards should be more curious than ever. The challenge will be in shifting from what was an acceptable way of doing things to seizing what will be opportunities that this new market environment creates.”
In business we need management to be more adaptive and aware. Boards need to be asking the right questions and directors need to be more hands-on. Parbery says “boards and management need to ask why they have been doing something a particular way and to consider whether it can be done differently.”
Now is the time to innovate, digitise and seek efficiencies - continue looking for new ideas. The solution to “cut all costs” as a blunt instrument is likely to be counterproductive in a more complex and volatile world. Increased diligence around cash flow forecasts, reassessing capital investment and defining ROI expectations are key, supported by communication within the business.
In an effort to mitigate, ask what we can control and control it. Battle test cashflow projection, all while looking for the opportunities that emerge through innovation, re-engineering and efficiency.
Look up Stephen Parbery’s profile on LinkedIn, someone who I am happy to read about but I wouldn't want a visit from.