| Businesses must prepare to deal with change and uncertainty. |
Many Canadian companies are enduring an unprecedented degree of change. The dramatic jump in the value of the Canadian dollar is only the beginning. Businesses have also been buffeted by uncertainty in global energy markets, tightening credit, a shaky U.S. economy and weakness across the manufacturing sector. It’s being described as a perfect storm.
In this environment, companies run the risk of complacency and even denial. “More than ever, you need to get a good, objective handle on your company's performance, financial health and competitive position,” says Ryan Brain, a partner in Deloitte’s Financial Advisory practice. “Unless you understand the fundamentals, you could invest considerable effort in hasty, short-term solutions. But what if you're actually heading in the wrong direction?”
Fallout from the current uncertainty includes reduced access to capital, liquidity challenges, flattening sales, increased operational costs and shrinking margins. These challenges are hitting companies faster than ever before, as market unpredictability has significantly reduced a company’s time and ability to react.
Companies can reduce their vulnerability to market volatility by focusing on the following:
- Understand your overall competitive positioning
Your company’s leaders must truly appreciate where the company stands vis-a-vis your competition. How exposed are you to decreasing sales across your industry? How will your competitors react? Who is expected to win and lose if your industry experiences a long-term downturn? Are you in a position to capture market share or grow by acquisition?
- Assess your operational performance
Know where your performance is lagging. While many organizations have capitalized on Canada’s recent booming economy, current market volatility leaves little room for waste.
- Review your balance sheet
Identify areas where you can improve both sides of your balance sheet. Is working capital optimized? Are there opportunities to refinance or renegotiate more flexible covenants? How can your company work with various stake-holders — including lenders, customers and suppliers — to ensure your balance sheet can withstand potential shocks?
- Determine your sensitivity to changing market conditions
Confirm how well the company can absorb market fluctuations. Assess how sensitive your organizational performance is to each source of volatility, and prioritize response plans based on potential bottom-line impact.
- Consider different market scenarios
Outline various scenarios to better understand how your company may be affected by market conditions. Then, match appropriate action plans to each potential scenario. For instance, what are expected profitability levels and subsequent company responses with a Canadian dollar at $0.90 versus at par with the U.S. dollar? How do things change with the dollar at $1.10? By focusing on these fundamentals, business leaders can get a better handle on the company’s level of exposure, and necessary action steps across various sources of market volatility.
Stay on top of market turbulence now, and over the long term
In times of uncertainty, companies should intensify their efforts to improve their competitiveness and overall agility. They need to zero in on the specific economic conditions that affect their business, and review all the options. They may need help from objective, third-party advisors who can identify options or scenarios that company management has not considered. These may include seeking additional capital, optimizing tax strategies, selling components of the business or restructuring others. Companies also need to isolate the areas where cost containment efforts can strengthen their ability to ride out market uncertainty.
The ultimate goal is not only to survive the uncertainty, but to position the company for future success — no matter the market conditions. “Companies must be able to respond to both instant and sustained change,” says Brain. “It’s one thing to put a band-aid on the company because of a fluctuating market. It’s quite another to ensure the company is well positioned to handle almost anything the market throws at it.”
In an economic climate where virtually every market is characterized by increasingly fierce competition, companies are challenged more than ever. By understanding where their vulnerable points are, and thoroughly considering various market changes and subsequent responses, Canadian companies can move beyond simply reacting to today’s market volatility.
| How to protect your company in a market downturn |
Canadian companies in all sectors are being challenged on many fronts: the strong dollar, a weakening U.S. economy and the credit crunch. Here are five actions companies can take to reduce their vulnerability:
- Know your competitive position
- Assess operational performance
- Review your balance sheet
- Determine sensitivity to changing market conditions
- Consider various markets cenarios
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Source: Deloitte & Touche LLP (see disclaimer)
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