Businesses need the ability to predict where the next shock will come from - Alan Meek

It is customary at this time of year to wonder about what the new year will bring us. No prizes for guessing that 2023 is likely to be an extremely challenging year with a sustained period of recession being predicted.

We have recently endured a succession of events, each of which on their own could have been calamitous for the economy. We have seen the Covid-19 pandemic, the Ukraine war, supply chain difficulties, labour shortages, interest rate increases, record inflation and a cost-of-living crisis coupled with political instability with three Prime Ministers and four Chancellors in one calendar year.

As we prepared to leave 2022, we saw industrial action in many sectors and public spending cuts. These are profound and almost certainly enduring issues. The effect of Brexit on our economy has been hard to discern given the number of other factors that have been in play. Outside of wars and global financial crashes, this has been an unprecedented period of change and uncertainty.

Despite this, we have not yet seen huge numbers of company insolvencies – it has taken until well into 2022 for insolvency numbers to return to pre-pandemic levels. Government support schemes have so far insulated and protected many businesses, but those stimuli are now a thing of the past.

Alan Meek is a Partner and Head of Restructuring & Insolvency, Morton Fraser

What does all this mean? Even businesses whose financial models have served them well so far, may now find that rising interest rates and inflation are so damaging to their margins that their existing models no longer suffice, particularly with many businesses entering this period with balance sheets that are far weaker than they were at the start of the pandemic.

In any economic downturn, cash is king, and so directors need to keep a keen eye on the cashflow projections. They must be able to predict and monitor any shocks or challenges to their cashflow and must be able to do so at a granular level of detail. The ability to control costs and collect debts rapidly and where possible to pass increased costs to customers in a sustainable way will be key to success and survival.

If the recent past has taught us anything, it is that businesses have to expect the unexpected. An ability to predict where the next shock might come from, and to be able to be proactive in dealing with the consequences of that shock, will be crucial. For directors to be ahead of the curve, they need to fully understand the economic and societal context of their business in order to future-proof as far as possible.

What sectors might find 2023 particularly hard? Any business that is dependent upon discretionary spending of individuals (and that means retail and hospitality in particular) is likely to see increased challenges and, if house prices are falling, this too may add to a further loss of consumer confidence. If there are challenges for retail and hospitality, that will inevitably mean that there are also difficulties for the commercial property sector.

On the upside, there is still a lot of investment money out there looking for a home and so we may see increased investment start to play a part. Traditionally in a recessionary economy we expect to see investors looking to get in at the bottom of the market; the skill being of course to identify when we are at the bottom of the market.

The past few years have meant that many businesses have developed a new agility and a willingness to change and adapt at short notice. Those skills will be at a premium in 2023. As always, there will be winners and losers in difficult times. But even the "winners”, and perhaps especially the “winners”, will have had to make many brave and difficult decisions on the way through.

Alan Meek is a Partner and Head of Restructuring & Insolvency, Morton Fraser.