A falling tide exposes all faults

22nd Jan 19

We don’t even have to mention the ‘B-word’. There are far too many indicators that the global economy faces stiff tests in 2019, and the UK’s own peculiar, parochial problem isn’t needed to still have every FD sitting up and wondering how their business might react if things start to go south.
What do we mean by ‘go south’? Take your pick. The pre-Christmas hiccup in global stock markets has subsided somewhat, but on historic price/earnings numbers, it still looks like some froth can come off the top. A lot of froth, possibly.
Corporate debt raised when interest rates bottomed out after the global financial crash is coming due, and no-one seems entirely sure that it’ll be straightforward to refinance – even if existing debt isn’t re-classified as junk this year, hitting all sorts of investment funds and banks, and playing merry hell with cashflows.
The p/e ratio thing gets even worse if the denominator number begins to slide. And while earnings and jobs have been on a pretty cushy ride for the past 18 months, the noises out of China and the sheer weight of consumer debt in the West suggest a profit-crushing cutback in consumption isn’t off the table for 2019. Ouch.
What does the growth-oriented FD do when the risks start to mount up like this? You’ve heard us say this before, but it’s still job one to hammer the numbers. The 13-week cashflow forecast, costs, fixed/variable overhead balancing, hedging financial exposures… all the stuff they teach you in FD school.
Then stay creative and diversify to spread the risk. We’re hosting our annual, invitation-only, growth FD event Contemporary FD in May this year, and out theme for 2019 is scaling up your business beyond borders.
That obviously means looking to international markets for sales and supplies. We know that the ‘B word’ comes into play a bit here. But new markets for your products and services, markets decoupled from economic woes at home, are a great way to both scale a business and protect it from domestic downsides.
But ‘beyond borders’ also means thinking about step-change opportunities in revenue, costs and control. For example, Harvard Business School professor Bharat Anand says businesses need to manage value redistribution when times are tough. ‘Complement’ businesses are usually outside your core – but create synergies from a customer’s perspective, not just a cost one.
And don’t ask existing customers what complements are, he says – it’s non-customers you need to win over when you’re looking to defend your position or grow quickly. As FD, you not only need to run the numbers on those kinds of plans – you need to drive them, too, pushing the board to manage risk with the right deals.
There’s one other factor to consider right now: purpose. As hard-nosed finance execs, I know you can be dubious of ‘do the right thing’ polemics and calls to slow down your innovative zeal. So take it from a hard-nosed finance exec – Black Rock CEO Larry Fink: ‘Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders.’ (His letter to shareholders this year is a must read.)
Add to that a growing weariness for hyper-efficiency. ‘An excessive focus on efficiency can produce startlingly negative effects,’ writes Roger Martin in HBR. ‘The rewards from efficiency get more unequal as efficiency improves, creating a high degree of specialization and conferring an ever-growing market power on the most-efficient competitors. The resulting business environment is extremely risky, with high returns going to an increasingly limited number of companies and people.’
He recommends as an alternative strategy… resilience. And we’re back to where we started: creative solutions to risks that are becoming deeper and more varied as we cruise in 2019. Building a resilient business doesn’t mean crushing costs or laying people off. It means having clear purpose, aligned culture, an eye to fresh markets and clear-eyed approach to risk.
And all without mentioning Brex… aw, shi…

FD Direct Limited (trading as Equity FD, Equity FC, Equity Interim and Equity Chair) has ceased trading.

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