Even though you would obviously love absolute control of everything as a business owner, uncertainty is unfortunately a fact of life. Operating a business – where you’re moving at a fast pace in a competitive, ever-changing environment – can mean even more uncertainty, especially financial uncertainty. So, what exactly is financial uncertainty and why is it so important that your business to be prepared for it?
What’s financial uncertainty and what causes it?
Financial uncertainty could be understood in accounting terms, where you can’t predict outcomes due to limited or inexact knowledge about the future. As much as we try to anticipate all the variables impacting business finances, we can’t control them. Your overhead costs, cash flow, debt to equity ratio, ability to fulfil debt obligations, revenue, and profit are some of the financial elements impacted by uncertainty.
Put another way, financial uncertainty revolves around our inability to predict the way future events or disasters can unfold, even if we’re able to identify the potential causes. Causes can include things like geopolitical issues, input costs, demographic and market changes, consumer sentiment, political trends, government policy, and economic conditions – all of which can drastically impact your bottom line.
Economic downturns, slowing growth, and new competitors entering the market can be sources of destabilisation for your business finances. Network complexity and social sentiment instability, compounded by things like social networks and social influence, can also lead to more financial uncertainty. Technology (along with technological risks like cybersecurity and environmental conditions like climate change) can also be disruptive for businesses’ bottom lines.
How to plan strategically for financial downturns and general financial uncertainty
Uncertainty can impact your business finances in different ways, both positive and negative. If you’re aware of potential uncertainties impacting your finances, you could avoid overconfidence and better prepare your business for them – and even end up benefiting competitively for growth and profitability when trends are negative.
1. Constantly scan the environment
Stay vigilant about what’s happening broadly on an economic level as well as what’s happening in your local area, your industry, and target market. By constantly monitoring your environment, you could better anticipate trends and make smarter choices, both about financial management and how to position your company.
2. Concentrate on resilience, relationships, and reputation
Maintain sufficient financial buffers to build resilience, and don’t overlook the power of relationships and business reputation in promoting business resilience. With strong relationships, goodwill, and a reputation for trustworthiness, you’ll have the support of others – both customers and suppliers – when times get tough. For example, help could come in the form of generous repayment terms and customer advocates who help market your business.
3. Don’t ignore growth opportunities
Don’t remain on the defensive and be concerned only about survival. Take a balanced approach to performance by pursuing sales and revenue growth. Maximise sales by training your team, diversifying your offerings, looking for up-sell and cross-sell opportunities, and conservatively investing in your capacity by outsourcing or otherwise expanding.
4. Take a long-term perspective
Don’t get caught up in the short-term demands and lose sight of the bigger picture. A long-term perspective helps you plan strategically and make large-scale changes gradually where needed. New challenges can reveal the true health of your business, so use the opportunity to create lasting, longer-term change to support growth.
5. Have a technology strategy in place
Technology is one of the fastest moving trends, so it can disrupt your industry and create significant financial uncertainty for your business, even when the economy is stable. Formulate specific technology strategies for your business and industry, not only to anticipate and respond to the potential disruptive threats, but also to stay ahead of your competitors and industry best practice.
6. Prepare for different outcomes
Don’t just have one Plan B; operate on multiple assumptions about possible outcomes so your business is ‘betting’ on different options. In this way, you’ll be prepared for anything and potentially drive your business to greater innovation. For example, you might not only maintain a financial buffer with a large emergency fund, but you may also have three or four different financing options – from a line of credit to potential investors – that can act as extra safety nets if you get into financial trouble.
7. Regularly review your business
On a regular basis, stop and review your business, strategy, and business plan. Look for potential issues and weaknesses so you can catch them before they get out of control. Get expert help to assess your business plan and strategy by reviewing key indicators like cash-burn rates, debt, sales, and revenue. Monitor changes in consumer sentiment and fluctuations in demand for products or services.
8. Watch your cash flow
Poor cash flow can lead to serious issues for businesses, even to the extent of threatening survival. Monitor your receivables and track cash flow with a cash flow forecast. Conduct realistic budgets so you can maintain a strong cash flow position.
Readying your business for periods of financial uncertainty
Financial uncertainty is a fact of life in the business environment, and there’s no guaranteed way to insulate your business against financial uncertainty. However, if you devise a solid strategy and keep up with what’s happening in the financial environment, you could end up more competitive, financially better off, and even see your business growth accelerate.
At TPH Advisory, we’re experts at helping struggling SMEs with innovative turnaround and restructuring strategies.Contact us today to find out what we can do for your business.