Businesses know that trading conditions for 2023 are going to be challenging due to high interest rates and high inflation, but are they doing what is needed to protect the bottom line and prepare for growth?
Despite the significant unpredictability of the market, economic and geopolitical landscapes currently ongoing, the release of some positive UK economic data has resulted in some optimism from the equity markets as 2023 begins, but this may be temporary. Better-than-expected sales statistics from retailers and hospitality & leisure operators collected since the start of the festive period, and the announcement that the UK economy grew by 0.1 percent in November, are some of the factors that have brought in a degree of optimism that the current economic downturn may not be as long, or as deep, as previously expected.
Evaluate the data alongside other market and trading information
History has shown us that it can be risky to trust early stock market reactions. Equity markets are usually the first to predict an economic improvement on the horizon, although sometimes it turns out to be a mirage, or a long way off; deceiving some early-mover investors and businesses to move too early and expand their activities. It is common knowledge that the risk of insolvency increases for businesses just when there are improvements in economic and market conditions.
Instead of placing too much emphasis on small snapshots of economic data (and the market’s reaction), businesses should evaluate the data alongside other market and trading information. Due to the rise in inflation and high energy costs tightening household budgets, it is expected that there will be a significant dip in discretionary consumer spend, and retail and hospitality & leisure businesses could get a feel for how deep the bottom might be early in Q1. Accurate forecasts and quick reactions could be critical to their survival this year.
Businesses that are dependent on credit lines to function, such as the construction sector including housebuilders, could be at a significant risk of being left with bad debts if demand starts to falter. In 2023 there may be more defaults on loans and repossessions as some homeowners are due to re-mortgage their properties, which could result in their monthly repayments increasing three-fold. Inevitably, this would make mortgages harder to acquire; dampening the demand for new properties and it would have a knock-on effect across the housing market.
Flight to value
Another key factor which will influence markets in the year ahead is the flight to value, this is because consumers will continue to search for products and services that offer them the same or better quality but at a lower price. In some situations, this could result in a shift in behaviour. For example, companies that offer kits making home-cooking easier, such as Gousto or Hello Fresh, could win over consumers who want to replace their usual dining out experiences with an opportunity to cook at home more often. As a result, this could bring more business closures for the casual dining sector, and as we saw from the recent pandemic-related experience, any habits that are learned during times of hardship could become permanent.
What are the strategies that businesses can follow to prepare for growth?
These are some strategies that businesses can follow to help to protect the bottom and prepare for growth:
Focus on the details, but don’t miss big opportunities
Business decisions are only ever as effective as the quality of the data that instructs them. Having current business information is vital; aiding businesses to carry out the right decisions in a timely way. However, leaders in business need to remain on the lookout for critical market shifts and ensure that they are prepared to adapt to them quickly.
Cash management should remain at the forefront
Cashflow analysis and forecasting are very important at the moment. As the public sector budgets are yet to be announced for 2023/24, businesses may have to go through more change in a variety of sectors. For example, changes that impact business rates in April could increase the pressure on retail businesses that are cash-strapped or office-based businesses based in town or city centres.
Invest in revenue-generating potential
As businesses have been stuck in cycle of constantly having to put out fires for several years, they may not have considered if today is the right time to invest resources in boosting revenues. As we saw during the pandemic, the businesses that diversify by investing in supplying new products or services could reap the rewards and allow some businesses to expand their market share. Even comparatively small-scale investment, for example outsourcing business development support, at a critical times could assist to increase revenues.
Customer centricity is very important
Decisions made by management should be evaluated through a customer lens. However, a word of warning, as recently displayed by Tesla’s decision to cut the price of its value-added electric vehicles, it’s important to think through decisions thoroughly. Reducing prices could backfire if previous customers believe that the product they own has now been de-valued, and ultimately, this could damage the brand.
Invest in making the supply chain resilient
Supply shortages and delivery delays were a major problem for many businesses in 2022 and this will probably continue. Despite the fact that some reports are suggesting that supply lines coming out of China are improving, raw material shortages globally are not going away. Exploring new avenues to spread cost and risk across the supply chain could help to improve resilience.
Promote your value proposition
Nowadays consumers are prioritising value for money, so businesses should investigate ways to augment and advertise their value proposition. For those that have a strong low-cost proposition from the beginning, promoting this to a larger audience may be all that needs to be done.