We live in a time when major economic upheavals are happening more frequently than ever. Events that would normally occur once or twice in a century are now occurring within a decade.
Over the past few years, we have seen the start of a new chapter in the story of globalisation with an escalation of the trade war between the US and China and the trading difficulties posed by Brexit.
The pandemic exposed a number of the vulnerabilities of our economic system and was succeeded by a war in Europe that has further tested the resilience of supply chains.
At the same time, climate change has begun to show its teeth with increasing extreme weather events, while the world's major powers are fighting over the rare earths, technology and metals that are needed for the green transition.
So how can businesses prepare for the next event? As a business manager how can you protect your business from the biggest financial risk factors?
Ongoing inflation
Although inflation has slowed since 2022, it remains relatively high. Inflation helps erode purchasing power and is especially dangerous for companies that find it difficult to pass on price increases. Therefore, when assessing your customers' creditworthiness, it is worth taking the time to make yourself aware of the extent to which they are exposed to and affected by price increases.
Recession
In order to deal with inflation, central banks around the world have raised interest rates. It is an effective medicine, but not without side effects. Higher interest rates take another bite out of purchasing power and make it harder to raise new capital.
Ultimately, some economies could sink into recession. A recession, combined with a high level of interest rates, could particularly affect highly leveraged companies and consumer-driven businesses. You should keep a particularly close eye on these types of companies.
At the same time, it is good to remember that you often see the highest volume of bankruptcy figures at the end of a recession. So, it is worth paying close attention to your credit policy when things start to brighten again.
Escalation of trade wars and geopolitical tensions
Tariffs and sanctions are a reality of today’s global trade landscape. There are a range of strategies businesses can employ including onshoring and ‘friend-shoring’. The key is to remain alert to developments in international geopolitics and take positive action to secure the best interests of your company.
Green transition
The transition to clean energy and other net zero actions offers many exciting opportunities. However, they can also pose a threat, especially for companies whose products are becoming obsolete (such as suppliers of combustion engine vehicle parts) and businesses that may not have the capital to invest in transition and may be vulnerable to C02 taxation or other penalties.
It’s a good idea to be aware of any green transition challenges that may impact your customers’ cash flow. In addition, it’s also important to look for bubbles. Companies with green technology can sometimes be valued very highly, even if they have not had positive earnings.
The unknown
Before COVID, almost no one predicted that a virus would change the world economy. Before the invasion of Ukraine, few would have thought that we would experience another major war in Europe. Whether the next big event is cyber war, climate change, artificial intelligence or something else, we don't know.
Regardless, the best way to prepare for such risks is to take an active stance towards credit management and develop a credit policy that takes the unexpected into account.
