Insights
Deal Team M&A Insights Through Mid-2024
Read MoreThe April 2024 International Monetary Fund (IMF) forecast talks of a ‘steady but slow’ global economic recovery that would largely be driven by growth in emerging markets. Its prediction for advanced economies was an underwhelming 1.7% growth in 2024 and 1.8% in 2025.
The pandemic may be starting to feel like a fading bad dream, but its economic impacts are still readily apparent. Around the world, central banks reacted to the soaring inflation of the post-Covid era with interest rate jumps, and borrowing costs remain well above pre-pandemic levels in many countries. Added to that, the world is experiencing a new era of geopolitical tension, ramping up the sense of economic uncertainty.
Against this background, and after several years of disruption, businesses in many sectors continue to struggle. To survive, they need to dig deep into stores of resilience, and exercise iron financial discipline. According to our experts, the businesses that endure in a subdued economy are often those that maximize cash flow while cutting costs and putting plans in place to grasp opportunities as soon as conditions improve. In other words, their operations have ‘financial hygiene’ at their core.
Unsteady economic recovery
Many advanced economies are struggling with stubborn core inflation and interest rates that remain well above pre-crisis levels. But different countries face different challenges, and some are emerging from the post-Covid downturn more quickly than others.
The U.S. has proved one of the most resilient of all developed economies, with growth forecasts of 2.4% for 2024 as a whole. But here too, significant challenges remain.
“Economic progress in 2024 and beyond is challenging to forecast and is heavily dependent on how the world navigates the various economic, geopolitical and social conflicts it faces,” says Howard Foote, office managing partner for the New York Capital Region. “Interest rates and inflation are the most significant concerns. The situation is among the most challenging that businesses and individuals have had to navigate in recent times.”
Financial wellbeing
Against this background, businesses have to continue to create or sell products, provide services and make enough money to pay staff, suppliers and bills. They also need to be in a position to spring into action when opportunities arise. This can be difficult in a tough economic climate, but it seems part of the solution is to practice financial hygiene.
“Financial hygiene is the series of practices and behaviors that individuals, businesses, organizations and even governments need to adopt to maintain healthy financial wellbeing,” says Foote. “It involves tasks such as budgeting, saving, investing wisely and managing debt responsibly.”
In short, financial hygiene ensures businesses have the money they need to operate effectively, both today and in the future, without piling on debt they might find hard to service.
Areas of focus
Within the broad area of financial hygiene, there are certain factors organizations need to focus on to promote resilience.
Maintaining cashflow is essential, and businesses need to keep tight control of incomings and outgoings. This is especially true during an economic downturn, when inflows tend to reduce. When that happens, savings may need to be made.
“Ensuring adequate liquidity to cover expenses and manage financial obligations is crucial,” says Howard. “This is a multi-step process but is vital in helping businesses ensure they are as resilient as they need to be. Certain best practices include forecasting cashflow on a regular basis, invoicing promptly and managing receivables to make sure you are receiving payments when they are due.”
The importance of planning
Financial hygiene factors tend to complement each other. When organizations have a firm grasp of cashflow, they are better able to take the action needed to promote resilience.
Cost cutting is often necessary but must be done in a way that maintains an organization’s ability to conduct core business. Spending, when that becomes possible, must be used to create efficiency.
“Businesses need to make sure that they are spending money in a way that will boost revenue, improve performance or lower costs elsewhere in their organization,” says Foote. “For me, other great cost management strategies should include having a clear budget, negotiating with suppliers for more favorable terms and embracing technology to help streamline daily operations.”
Business planning should not become a victim of wider economic circumstances: organizations need to be able to grasp opportunities when they arise. But having complete and up to date information on cashfl ow, budgets and potential areas for cost cutting gives companies a clear idea of the options available to them. “Developing strategic plans to adapt to changing market conditions and identifying new opportunities is part of financial hygiene too,” says Foote.
Valuable partners
Keeping on top of financial hygiene factors can be hard work, especially when businesses are fighting hard for every sale or new account. But professional services firms are perfectly placed to help.
Foote affirms that third-party professionals can maximize financial hygiene and help firms create real resilience, even in tough moments. “We can assist clients in weathering economic storms and other uncharted disruptions through our bench strength of experienced professionals. We understand the factors that impact stakeholders the most, sorting through the mass of data and information available to provide significant insights into sector and global trends. We address financial hygiene from an experienced perspective.”
Not all businesses will be in a position to invest in new technology or plan in detail for an unknowable future, but they can focus on cashflow and create accurate and timely financial forecasts. While these activities may sound mundane, they are the bedrock of resilience during periods of subdued economic activity. As our professionals have said, UHY member firms worldwide are on hand to help businesses implement financial hygiene and ensure stability until economies improve.
Read more stories in Issue 18 of the UHY Global Magazine published by UHY International.
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