By Bryan A. Tannenbaum, Partner and Recovery and Restructuring Practice Leader, RSM Canada

We must, as governments around the world increasingly tell us, “Learn to live with COVID”. Many small and mid-market businesses, though, are wondering what this really means.

Governments around the world including several in Asia, Europe, North America and the Middle East stepped in and opened up various relief programmes to businesses to soften the blow of the pandemic, with a view to protecting their own, as well as the global, economy. Programmes consisted of government-backed loans as well as payments to cover a significant portion of the payroll costs for millions of businesses worldwide.

These programmes have been expensive but by and large, have been considered to be successful: The result being that in Canada, as well as in many countries around the world, the number of bankruptcies during 2020 and 2021 were lower than before the start of the pandemic. 

Government relief packages have now largely come to an end. The UK’s Coronavirus Job Retention Scheme (CJRS) finished at the end of last September. Similar programmes in the US and Canada ended in May and October 2021, respectively, with France’s long-term partial activity scheme due to end this June (2022).

Now that governments have stopped funding businesses, companies are again on their own in their post-COVID recovery, and they face a daunting outlook. Hopes of a “V” shaped recovery have long faded with the recurring variants of the virus, but few predicted the challenges businesses around the globe are facing post-pandemic; namely, labour shortages, local and global supply chain disruptions, and, most recently, soaring energy costs and rising interest rates. The proverbial perfect storm.

In May, the Bank of England, for an fourth consecutive time, raised interest rates to the highest level in 13 years. It followed the Federal Reserve’s rate hike the day before – the sharpest rise in over two decades. Many now expect the European Central Bank to follow suit in July. And while rates remain historically low, the rises – and increases in inflation – are expected to continue.

Creating the financial model

Businesses, as has always been the case, will need to grow profits and contain costs. Unfortunately, the ability to thrive, and perhaps even to survive, is becoming more difficult in the present environment. Now more than ever, companies need to be flexible enough to respond quickly and effectively to these ongoing changes. This translates to anticipating increasing costs for materials, higher interest rates, supply chain interruptions, government sanctions within the geographies they operate or a number of other variables that fate may throw at them. If the last few years have taught us anything, it is that the world is unpredictable and timely responses are crucial.

To do that successfully, businesses need to ensure that critical information is timely and readily available, and that they master the ability to analyse that information. Financial information can, and should, be used to prepare projections taking into account different scenarios.

There are both internal and external reasons to continually prepare and review projections. Externally, this information is likely to prove critical for a company’s lenders and other stakeholders. In an uncertain economic environment and when businesses are having to pay back COVID-era loans, rather than providing more support, lenders will be more active in monitoring the results of their customers. Seeing evidence of reliable reporting and financial forecasting will demonstrate that the business is “under control” and will provide much needed reassurance to lenders. It will also assist businesses make a more compelling case for additional financing if additional funds are required.

Internally, projections allow management to take steps before things “come to a head”. Management’s recognition that actions are required to maintain liquidity will often result in the identification of redundant assets that can be sold, expenses that can be reduced, etc. Taking proactive steps is often the course of action that allows management to remain in charge of the company’s destiny rather than have its lenders impose their demands in order for their financial support to continue. The projections also provides management with fresh opportunities to consider alternative funding sources when traditional lenders are increasingly cautious but when private markets, including private equity, have more than $3.3 trillion on the side-lines looking to be put to use.

The full set of skills

Even without external pressures from creditors, there are compelling reasons for businesses to start taking their financial systems and modelling seriously. Failure to make sure these items are top notch, or a top priority can result in a business failing even when economic conditions are favourable. Every accountant has stories of enterprises that fell into difficulties while seemingly thriving - growing revenue without profit, unknowingly selling products at a loss and running into cash flow problems. Poor visibility of their finances and a lack of forecasting can result in crises coming unexpectedly and arriving without warning.

In an unpredictable and fast-changing environment, an increasing number of businesses will not just run unwitting risks; they will miss out on opportunities that are before them. The past couple of years have made both suppliers and customers question their fundamental business assumptions – the increasing globalisation of supply chains being one example. The opportunities such changes present can only be properly evaluated and exploited when a clear view of the company’s costs and requirements are visible.

Put simply, middle market business owners and leaders could, in the past, often succeed by relying on their sales skills or perhaps the quality or efficiency of their manufacturing process. In effect, some made money in spite of themselves. However, with today’s fast rate of change, this is no longer the case. Leaders need to ensure that their team considers all aspects of the business. This includes enhancing processes for sales generation, the management of supply lines, and dealing with labour shortages or managing other operational challenges. They can only achieve this by utilising the best information available. Central to this is the finance function which should tie the different areas of the business together and provide solid information from which to determine priorities and strategy.

Many businesses may not have all the skills needed in-house. Given current labour shortages, that is unsurprising. In such cases, it is essential that where they are operating without crucial skills in-house, business leaders turn to their trusted business advisers.

In short, at times of turbulence in economies, markets and the world, businesses cannot afford to be flying by the seat of their pants.