In 1973, OPEC led an oil embargo that spiked energy costs across the world and kicked off a period of rising inflation. In 1947, following the end of World War II, the alliance that won the war fractured into competing blocks that altered global trade flows and international security. In 1919, an influenza outbreak spread rapidly across the world killing millions and shocking the global economy.
Whereas the crises listed above happened over more than half a century, in just the last decade we’ve all witnessed an energy shock resulting from the Russian invasion of Ukraine, a global political realignment as China took a more prominent role, and a pandemic that affected how we all live and work. Experts from historian Adam Tooze to the World Economic Forum have speculated that we’ve entered the ‘age of the polycrisis’ in which overlapping crisis influence and are influenced by each other in complex and unpredictable ways.
While the polycrisis is analyzed and debated at the highest levels of the economy, its effects are felt on the ground with business risk rising ever higher. Business owners and leaders must confront the ongoing risks to their individual businesses by controlling what they can and making the tough decisions that will help them be successful during this challenging time.
Increasing business risk
The various crises afflicting society manifest in many ways, but there are three core business risks that are having the greatest impact.
First, a combination of inflation and rising interest rates to combat inflation are increasing the cost of materials and the cost of financing. The cost of financing is especially challenging given that the low-rate environment of the past 15 years had made it easier to manage increased costs in the past. Unless those increased costs are passed along, margins will be squeezed and the business will have less room for maneuver.
Next, the pandemic had a drastic effect on the labour market with some workers leaving their jobs and the job market altogether. The resulting labour and skills shortage has been difficult for businesses to manage in the short term and has led to production slowdowns, increased labour costs or both.
Finally, systemic issues are, by their nature, felt across the board. This means that suppliers are confronting the same pressures and will need to manage them by increasing their prices…and your overhead. Increasing costs to insurance, utilities, benefits, rent and even tax rates all contribute to a tighter financial situation. Even if overhead costs haven’t yet risen, businesses should prepare for increases in the coming months and years.
Together, these factors combine into skyrocketing business risk. Companies that aren’t out ahead of them will find themselves in uncomfortable situations, including breaching lending covenants and intermittent cash shortages.
To make the changes you need to prepare yourself for the future you must first understand the past. What is your current situation and how did it come to be? Historical financial reporting is the documented story of your business. And, as with any story, there are elements within it that foreshadow what’s yet to come. For instance, cash flow drains or steadily rising debt both backward-looking indicators that raise a flag of potential issues down the road. It’s always important to review your reporting processes, but it becomes even more critical during a time of increased risk like the one we’re currently in. Ensuring your historical financial reporting is giving you high quality and timely information could be the difference between catching an issue before it becomes a real problem and catching it when it’s too late.
Obviously, looking back can only do so much. Ultimately, you need to implement strategies that will overcome the problems you’re confronting. Forecasting and modelling can put your strategies to the test by detailing the steps you plan to take and the effect they’ll have on your business. This will give you confidence in your plans and help you to push forward with the knowledge that the steps you’re taking will contribute to your long-term success. Additionally, this work can demonstrate your business’ viability to financial institutions and help you manage lending constraints.
No matter your situation, take action
However, you choose to confront the polycrisis, the faster you act, the better your situation will be. The reporting systems and processes you put in place today are the same that will save you grief tomorrow and beyond—there’s no downside to having them in place. If you don’t have the in-house expertise necessary, work with a trusted partner to get on top of these issues.