What to Do About the Looming Credit Crunch
The Hackett Group’s European Advisory Services Practice Leader Martijn Geerling talks with European Practice Leader David Ketchin about the financial impact of the pandemic on European businesses, and how companies can prepare for potentially rising interest rates in 2022.
Welcome to the Hackett Group’s Business Excelleration Podcast, where – week after week – we hear from experts on how to avoid obstacles, manage detours, and celebrate milestones on the journey to world-class performance. This episode of the podcast, hosted by the Hackett Group’s Practice Leader for Advisory Services in Europe Martijn Geerling. His guest today is David Ketchin, Hackett’s Practice Leader in Europe.
In today’s session, we will talk about Covid-19’s impact on business services. While it didn’t start as a financial crisis, it may be morphing into one. Headlines have been dominated by news of the world economy restarting, causing supply chain disruptions and concerns of rising inflation and interest rates. This may be the end of a long period of low cost to finance for companies and may expose highly leveraged companies in the process.
As the episode gets underway, David identifies signs that we may be under a credit crunch and how different business sectors will be affected. If it comes, the impact of this credit crunch is going to be very different according to sector trends, inflation, debt and refinancing. Unlike the 2008 credit crunch, which impacted different companies equally. The pandemic impacted hospitality, travel, high street retail and oil/gas, whereas online retail and high tech have done really well. High street and freight have seen high levels of inflation while governments are scrambling to figure out how to control rising prices. In terms of the availability of cheap debt, government funding called bounce back loans was made available in the U.K. to assist businesses and major overseas companies. It is uncertain how much will be made available if there were a second need for it.
There are a few ways executives, specifically in finance, can be prepared to address this issue. The first thing to consider is the funding requirements of your organization both to thrive and survive. Considering the potential outcomes of not being able to bounce back post-pandemic involves planning, forecasting and running possible scenarios to ensure you’ve really thought through the needed funding. Be prepared for both scenarios: economic resurgence or an elongated pandemic. Creating true agility requires not only thinking about what might happen, but extends to determining what you may need to do to execute your strategy.
Among their clients, there haven’t been many projects focused on a transformation of order to cash. However, the last two years have proved an increased demand for just that. The first area organizations should focus on in this front is cost allocation profitability analysis end to end. Then, look at the quality of a customer and their ability to pay. Accurate billing is the foundation of getting cash in, so it is very important to pay attention to that. Finally, being on top of the segmentation of your customer base.
Then, they discuss the challenges in regards to the source to pay side and the actions which can be taken to address that part of the equation. Risk management across the supplier base is the single largest issue to keep in mind. Suppliers are facing major obstacles right now and reviews should be conducted constantly to judge the financial health of those suppliers. Instead of consolidation, you may need to have more than one partner to make sure you have a certain supply. However, you don’t want to be doing this at the last minute. Audits should be done around sustainability, modern slavery and other important regulations. Finally, there is generally an opportunity to drive greater enterprise efficiency through technology.
If there is one thing we can be certain of in light of the pandemic, it’s that it is impossible to forecast what might come next. Thus, it is important to hope for the best and plan for the worst. If they have hypothetical scenarios worked through, businesses can respond in an agile way to what is to come.
- 0:51 – Welcome to this episode, hosted by Martijn Geerling.
- 1:50 – How different economic sectors have been impacted by the pandemic.
- 3:55 – The availability of cheap debt.
- 5:44 – How can executives plan to address this issue?
- 10:17 – What actions should companies consider on the credit and revenue side?
- 13:50 – Challenges of the source to pay side.
- 16:47 – Embracing technology acceleration.
- 18:05 – Key takeaways from today’s episode.