- Manage recession by managing risk
Robust risk management secures against economic uncertainty.
Robust risk management bolsters companies against the severe challenges of economic uncertainty. As South Africa slips further into recession, businesses focused on mitigating risk can increase agility, ensure resilience and, in time, return to growth.
This is the view of Richard Walker, Director: Advisory Services at Grant Thornton.
He adds: “In turbulent times, a risk management plan should be agile and adapt to changing business conditions. This will reduce the impact of a recession and ultimately ensure the business remains liquid.”
South Africa’s economy shrank by 0.7% in the first quarter of 2017 according to Stats SA, moving the country officially into a recession. Accordig to Stats SA, ‘recession’ is defined as a time when South Africa experiences two (or more) consecutive quarters of negative growth.
Coupled with the negative outlook from the three major rating agencies, consumer, business and investor confidence has hit an all-time low.
The latest Grant Thornton International Business Report (IBR) shows the number of businesses affected by uncertainty regarding the future direction of the economy, jumped by nearly 10% from the first (Q1) to the second quarter (Q2) this year. Sixty seven percent of SA business executives stated that the turbulence in the SA economy over the past six months, and uncertainty about its future direction, affected their business operations and decisions. This compared to 58% in the first quarter of this year.
The International Business Report (IBR) from Grant Thornton provides tracker insights from around the world on a quarterly basis. The Q2 survey provides insights from over 10 000 C-suite executives across more than 37 economies, to the end of June 2017. Regional and national views are surveyed every quarter from 400 South African privately-held business executives (100 executive interviews per quarter) regarding issues ranging from crime and service delivery to political climate.
When executives were asked how economic turbulence was impacting their operations, 48% stated that they were putting off investment decisions while 39% were considering investing offshore rather than in SA. 55% stated they were delaying business expansion plans and 25% were considering selling their business altogether.
Walker says that executives are beginning to question if their business can continue to target growth given the harsh economic realities. He firmly agrees with type of questioning and believes that businesses should consider maintaining a ‘holding pattern’ instead of targeting growth at this time.
“This does not mean businesses should become reactive to simply survive; in fact, maintaining a holding pattern requires a business to step back and determine how the recession will affect it and then adapt its strategy accordingly,” he says. “Taking a step back is a proactive approach and provides an opportunity to improve or change the business outlook.”
Grant Thornton’s IBR has further revealed that 63.5% of local businesses do have a risk management strategy in place.
“It’s encouraging to see that such a large portion of SA businesses do have a risk management plan in place. A powerful risk management plan will ensure that the business has an adequate working capital management programme to retain its credit profile and maintain solvency,” says Walker.
Walker emphasises that it is vital for business executives to ensure that their working capital strategy continues to adapt and change as the business strategy changes.
“In a business faced with the risk of poor sales due to an economic downturn, for example, the mitigating action plan might be to move from a conservative towards a more aggressive working capital strategy,” says Walker. “For such a business, an objective of 30% return for investors would not be achievable and its objectives may need to change in a holding pattern strategy to maintain current revenue. This change would likely result in a change in the working capital strategy.”
Initial stress test results of the new business strategy may show that the business needs an aggressive working capital strategy, such as to sweat its assets by increasing the business cycle to maintain revenue and maximise inventory management. This, however, would come with specific risks that would need to be managed to ensure the new business strategy is achieved. Such risks could include inventory shortages and ultimately loss of sales, which would impact suppliers as businesses necessarily extend credit terms which in turn could result in ‘cash-only’ policies or non-delivery of raw materials.
“A robust and agile risk management plan would identify these risks at an early stage. The business would be able to apply mitigating actions, such as ensuring suppliers are kept informed of their new business and working capital strategy, so they too are able to change their business accordingly,” Walker concludes.