With confidence dropping, local companies and public sector organisations must act now or face a potentially gloomy outlook. Mel Egglenton, senior partner of KPMG in Birmingham, looks at the key issues.
Business surveys addressing confidence levels have presented a mixed picture until recently. There is no doubt that we have been in a period of relative calm in comparison with the woes inflicted upon the city of London following last year’s credit crunch. However, as current surveys bear, the knock-on effect of the credit crunch is now hitting home across UK regions, with managers reporting lowering levels of confidence in the forthcoming economic climate.
Indeed, KPMG’s own National Business Confidence Survey which is carried out every quarter, indicated a significant change in the levels of optimism from quarter one to quarter two of this year.
Only 40 per cent of those people surveyed felt optimistic about their own company’s prospects for the forthcoming year, compared to 60 per cent who were feeling bullish in March. When you add to this the fact that no one really knows how long it is going to last – some predictors have said 2009, while others have indicated a much longer term – there is every need for local managers to be cautious.
The elements that are coming together – rising inflation, tightening credit conditions and plummeting consumer confidence – will make life difficult for at least the next 12 months. Indeed, many good managers will be factoring in a longer term threat to ensure their business does not get caught out.
There is much talk of inflation continuing to rise and this is likely to spark increases in costs which in turn will hit businesses with the double whammy of decreasing profit margins and higher wage demands from employees as they grapple with the rising cost of living.
As a result, a business is likely to feel squeezed from both sides and how managers deal with this will be crucial in determining success or failure.
From previous market turmoil, including the recession in the 1990s we have learnt that a ‘business as usual’ strategy is simply the wrong approach in market conditions such as these. As a result, organisations need to focus on key areas for their survival and do so quickly to ensure they are as well positioned as they can be when pressures really begin to bear down.
Businesses need to take steps to reduce costs and improve cash flow. By interrogating their forecasts, talking to customers and questioning their spending and use of working capital, managers can identify key risks and opportunities within their business.
Within this supplement we address many of these key areas, providing practical help for managers who are having to grapple with these conditions. If actioned promptly and appropriately cost savings can be made without the need for drastic change or damage to a company’s reputation.
Whether releasing cash from a business or ensuring that appropriate controls are in place to stop any losses as a result of fraudulent behaviour, local organisations need to take stock now.
Also within this supplement we look at how the impact could be felt across the public sector as they face the potential threat of an increase in demand for their services – a knock on effect from the private sector being squeezed.
Whether operating in the public or private sector, it is easy to fire-fight and not maintain a push for future growth. However, it is vitally important for businesses to remain focused on their overall strategy and not lose sight of the fact that changing economic conditions can provide opportunities. The new and emerging markets remain the global powerhouses and for the time being are still performing well against difficult global conditions. As a result, for those businesses who have not yet considered carefully whether they have a market within these areas, a major threat could loom from competitors.
Furthermore, as their economy continues to hold up, inward investment opportunities remain. In recent months there have been a number of announcements about joint ventures between local firms and those in emerging markets. With funding for such activities not affected as much as in the developed nations, it is unlikely that we will see any let up in this as we move through the next 12 months.
Opportunities also exist for those organisations that want to acquire businesses and are able to secure funding from other sources. With the power shifting from the seller to the acquirer, there are many opportunities for prices to be driven down and strategic acquisitions made.
Whichever area is causing the most concern, the work must start here.
For those organisations that choose to ride out the storm and hope for the best, a tricky future is likely to lie ahead, even after conditions begin to improve. Conversely, for those businesses who tackle the issues head on, they stand a greater chance of emerging from this part of the economic cycle in a stronger, more competitive position.
West Midlands businesses have a real chance to once again, demonstrate their resilience by ensuring their strategies are robust.