A BUSINESS-as-usual approach to new financial year planning won’t guarantee smooth sailing in the next financial year, according to Graeme Matthews, national managing partner of KPMG’s middle market advisory practice.
As businesses are in planning mode for the new financial year, he says, they need to take into account the flow-on effects from the US downturn and the changing business environment of the local economy to adjust their strategy accordingly.
“Interest rates are the highest they have been since March 1995, unemployment is still at an all-time low, petrol prices have gone up 39c per litre in the past 18 months and this all equates to pressure on Australian businesses,”Matthews said.
Despite the aforementioned pressures, Australia is currently experiencing a two-speed economy, with some businesses flourishing in the current resources boom.
But with most businesses biting their fingernails about the economic outlook, there are precautions they can take to safeguard their business from further economic downturn.
“What business operators need to do is to consider how well cushioned their business is and what can be changed in the short term,” Matthews advised.
In the UK, a global study recently found that British business has been caught out by the economic downturn with a lack of forward planning for changing economic cycles.
According to the Hay Group research, firms have been preparing for a slowdown for just ten months on average – the point at which the credit crunch hit.
More than a quarter (27 per cent) of business leaders confess that they have only been preparing during the past six months, whilst close to a fifth (18 per cent) admit they have only just begun their preparations.
As a result, UK business leaders forecast that the slowdown will hit profits by 1.3 per cent on average over the current financial year (2008/9) – a fall equivalent to £900 million ($1843 million) across the economy.
“British businesses have been caught out by the downturn – and now risk is missing the recovery too. Business leaders must recognise that it will not be business as usual after the current economic strife,” said Russell Hobby, associate director at Hay Group. “Planning for the recovery starts now.
“Now is the time to acquire talent, market share and customers from weakened competitors, and maintain bullish investment in R&D to leapfrog those who have lowered their sights.”
The research highlighted not only a lack of planning, but also an ill-conceived strategic response to the current downturn by companies.
More than half (51 per cent) of business leaders admit they that have the wrong strategy in place for current economic conditions. In excess of a quarter (26 per cent) have made no changes whatsoever to their strategy in the light of the new climate.
“The greatest challenge faced by Britain’s business leaders is executing the right strategic response to the downturn,” said Hobby.
“The keys to execution are intangible: talent, relationships and knowledge – and so are the first to suffer from knee jerk responses to economic uncertainty,”he said.
In the US, a Boston Consulting Group study found that more than 80 per cent of US business executives think their companies are better prepared for a downturn than their competitors are, even though few have taken any measures beyond basic cost cutting.
“A major downturn can fundamentally change the dynamics of an industry,”said Reinhard Messenböck, a partner with Boston Consulting Group.
The study found that after the last recession, 30 per cent of companies that had been among the top ten players in their respective sectors dropped off that list, and fewer than 10 per cent of those that dropped off ever made it back. This is because a downturn magnifies relative strengths and weaknesses.
Companies that survive and thrive during tough economic times build advantages in three critical areas: mindset, preparation, and execution.
“Companies in strong operational and financial shape have greater freedom to make strategic moves when times get tough,” said Udo Jung, senior partner, Boston Consulting Group.