Picking the bones out of economic forecasts is always in part an exercise in determining who is trying to tell you what. Back in November when the Chancellor of the Exchequer Jeremy Hunt delivered his Autumn Statement, he attempted to make a virtue of the Office of Budget Responsibility’s forecast that the UK economy would grow by 0.7% in 2024.
This was despite the fact that the 0.7% figure was a significant markdown on the OBR’s previous forecasts, and was probably spun on the fact that 0.7% is higher than the 0.3% the likes of KPMG were bandying around a couple of months earlier.
This is, of course, economic splitting hairs at its finest. Whether 0.7% or 0.3%, the prospects of GDP growth in the year ahead are hanging by a thread. Indeed, the latest figures show that the economy shrank in Q3 2023. If that’s repeated for the final three months of the year, we’ll enter the new year in recession.
At the start of any year, there is always plenty of talk about plans, resolutions, and goals for the year ahead. Businesses can and should still be ambitious in their strategies. But with the threat of recession hanging over the economy, it’s only sensible to pay equal attention to how your business can cope with the potential risks.
What risks do businesses face?
Whether we slip into ‘official’ recession or not, there are a number of factors that pose risks to businesses going forward. While inflation has fallen steadily throughout the year from its double-digit peaks of 2022, business overheads in key areas like energy and logistics remain significantly higher than they were a few years ago.
The cost of living crisis sparked by soaring inflation has also taken a heavy toll on consumer spending and confidence. That’s unlikely to change while low or negative growth prevails, as it will mean wages are highly unlikely to rise. Reduced consumer activity means businesses will see their revenues stagnate or decline. This quickly has a ripple effect through B2B supply chains, too.
Finally, there’s the question of high interest rates. On top of all the other inflationary pressures, businesses have seen the cost of debt rise significantly over the past two years. Companies are having to pay more and more just to service existing debts, squeezing working capital that could otherwise be invested in growth. Even temporary dips in revenue can put stretched businesses at risk of not being able to pay their bills, and slipping into insolvency.
Understanding risk
The first step to managing risk in your business is understanding where you might be exposed. This is a good time to undertake an audit of your finances, to get a deep-dive view of strengths and weaknesses.
Undertaken by a qualified accountant, a risk audit will set out the implications of various financial scenarios. For example, if interest rates remain at their present rate or rise again, how will your exposure to debt impact liquidity? What kind of buffer do you have in your current margins against further cost increases, or falls in revenue?
When you can see the risks laid out ahead of you, you can put mitigation plans in place before they happen. Understanding how to protect yourself against risk is just as much a part of business success as planning for growth.
