Recession readiness: How resilient is your business?

Key economic indicators and a number of global factors suggest that a recession may be imminent. We outline the special considerations your business needs to make.

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Key economic indicators and a number of global factors suggest that a recession may be imminent - are you prepared?

Is recession possible in the Australian economy?

  • Consumer confidence has consistently declined throughout 2022, and December 2022 saw lower levels of consumer sentiment than seen during the Global Financial Crisis (GFC).
  • The Reserve Bank of Australia (RBA) is increasing the target cash rate substantially faster than seen historically. Recent RBA research suggests that if interest rates reach 3.5%, 15% of all borrowers will have negative cash flows.
  • Retail spending over the past two years is experiencing unprecedented volatility.
  • China’s stalling growth and rising COVID cases, combined with the ongoing disruption and uncertainty caused by Russia’s invasion of Ukraine, have had substantial impacts on global supply chains.
  • Australia’s reliance on key global players like the US, China and the UK requires us to be cognisant of factors impacting the global economy. Australia was able to insulate itself from the worst of the GFC; will it be the same this time?

Global recession insights

“With high inflation, rising interest rates and a yield inversion of two-year and ten-year US treasury bonds, the US market is undoubtedly seeing several key economic indicators hint at a potential recession.

These indicators, coupled with significant supply chain complexities, declining manufacturing activity and consumer confidence, have business leaders concerned.

Management teams in the US are seeing a potential recession as not an ‘if’ but ‘when’ and have pivoted their focus and looking to their advisers as to how they can best prepare.”

Scott McMurdo, Advisory, BDO USA*

*Scott is currently on secondment from BDO Australia with BDO’s Advisory team in New York, USA.

Recession readiness for Australian businesses

  • Cash needs to be a key focus for resilient businesses looking to capitalise and weaker businesses looking to survive.
  • For organisations in good financial standing, market turbulence creates opportunity — if they have the foresight and agility to seize it.
  • A downturn may require more defensive measures for organisations with tighter finances or high demand elasticity.
  • Building strategic resilience (or the capacity to withstand business shocks and pivot to new opportunities) early into an economic downcycle separates the businesses that thrive from those that struggle.

question iconQuestions you should ask

  • What would you do if you had a three to 12-month head start to prepare your business for a recession?
  • Is your industry or, more importantly, your business resilient to a recession?
  • What can you do to soften the fall or, better yet, go on the offensive to create value-added opportunities?
  • Are you aware of the impact of a recession on your key customers or suppliers?
Need help? We have local teams across Australia ready to assist, contact us today.

 

Key warning signs of financial distress

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Default on bank loan covenants
 

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Short on cash
 

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Declining sales and shrinking margins

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Excess inventory, DIO fluctuations

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Ageing creditors
 

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Excessive employee or management turnover

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Change in auditors or revolving financial advisers


BDO’s Strategic Resilience Framework

Where is your business, and what needs to be your strategic focus?

BDO's strategic resilience framework highlights that not every company is in the same place when it comes to the current economic environment. Because of this, the operational or strategic focus point for every business will not be the same. Our goal is to help companies RECOVER from operational and strategic challenges and ensure they have the adequate tools to be able to THRIVE. Business leaders should remember to seek opportunity in times of economic volatility.

BDO's strategic framework
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Gauge your business’ resilience

Where is your business on this spectrum?

Limit losses ...CUSTOMER STRATEGY ... Place big bets
Core business focus ...OPERATIONS ... Vertical integration / market expansion
Respond to disruptions ...RISK MANAGEMENT ... Anticipate using predictive analytics
Instil internal financial discipline ...LIQUIDITY AND CASH FLOW ... Become the source of funding
Maintain compliance ...REGULATION, LEGISLATION AND COMPLIANCE ... Meet the moment

Liquidity and cash flow during times of recession

In a recessionary environment, cash and liquidity management needs to be the paramount concern of business leaders.

BDO’s Special Situations Advisory team can assist business leaders and other stakeholders in having the necessary liquidity and cash management tools to adapt to the challenges of the current economic environment.

Questions for business leaders and stakeholders

  • Can you identify your top challenge related to cash management (covering operating expenses, financing investments etc.)?
  • Is your business showing signs of distress? If so, what are they?
  • Do your current processes and tools allow you to manage liquidity and forecast cash levels effectively?
  • Are you implementing strategies to allocate capital effectively and improve cash generation and conservation?
  • Have you investigated strategies to identify and execute cash flow opportunities and maintain the levels of liquidity needed to navigate uncertainty?
  • Did you develop and maintain an accurate and granular view of the timing of money moving in and out of the business to understand liquidity constraints and funding availability, as well as surpluses available for investment or distribution?
  • What is the status of your relationship with creditors and other stakeholders? Do you have a working relationship that garners trust and transparency?
  • Have you identified all sources of existing capital and new sources of capital to understand liquidity constraints or surpluses available for investment or distribution?

How we can help

The BDO Special Situations Advisory team works closely with businesses, borrowers, lenders and stakeholders to provide tailored advisory solutions to navigate situations of financial distress, operational challenges and underperformance.

We have strong track record of obtaining results for clients. You can take confidence from our proven process, backed up by careful planning, effective communication and knowledge transfer to your stakeholders.

Working capital and cash flow modelling iconWorking capital and cash flow modelling

Robust short-term cash flow forecasting is critical in the development of a strong cash culture. This culture leans on strong debt collection processes, sophisticated inventory management and well-negotiated account payable terms. We assist businesses develop three-way forecast models and help to identify working capital improvement opportunities that exist in all businesses to release cash flow pressures.

Debt advisory iconDebt advisory

Refinancing or obtaining new debt in the current environment can be challenging, as financiers seek to reduce risk and improve margins. Through BDO’s strong relationships with major banks, alternate and non-bank lenders, credit funds and private equity, we assist clients to source the right finance option for their current circumstances.

Distressed M&A iconDistressed M&A

Buying and selling distressed businesses means overcoming a range of complex financial, legal and operational challenges under considerable time pressures. Working with our corporate finance team, we can conduct a fast-tracked, targeted M&A process to maximise the value of a business that is facing financial difficulty.

Pre-lend and independent business reviews iconPre-lend and independent business reviews

Assisting financiers with their due diligence by undertaking an assessment of the proposed borrower or reviewing an existing borrower. Using our expertise and experience, we critically analyse the financial position of the business, key drivers in their forecast and identify risks and mitigants to allow financiers to make an informed decision about their borrower.

Restructuring and turnaround advisory iconRestructuring and turnaround advisory

Development of a turnaround plan to stabilise a business by identifying performance issues, cost cutting initiative, revenue growth strategies. Turnaround plans need dependable financial scenarios supported by detailed operational planning to support decision making

Safe harbour iconSafe harbour

The safe harbour regime provides protection for directors of businesses in distress where they are pursuing a course of action that is likely to lead to a better outcome than an insolvency scenario. As part of this process, we assist clients to assess their current position, prepare a turnaround plan and monitor the implementation of the plan.