Managing the current shifting paradigm and embracing business opportunities

Updated: Jul 29



In the current macroeconomic context, understanding day by day changes and actions taken by institutions and governments may not be easy. In particular, determining what might be the impact on your business opens up scenarios of uncertainty and, sometimes, immobility about the actions to be taken.


If in recent weeks it was almost impossible to come across articles and news that did not talk about inflation, the narrative is shifting to a theme that links many of the macroeconomic factors involved: the recession.


Talking about recession in the light of today’s events is not out of place, and although it is now common to observe the volatility of the economic cycle, focusing the attention on recession could minimise the importance and effectiveness of the policies that the institutions are adopting.


That is because a mild increase in the inflation rate is attributable to the rapid economic recovery since the second half of 2021. A more substantial growth of inflation is indeed linked with the dearth of supply, which has been exaggerated by the general increase in energy costs.


Monetary policy, and thus the ability of central banks to steer the main interest rates against the current phenomenon, is a primary tool to maintain price stability.


What changes have taken place in the monetary policy in recent months? And above all, what challenges or opportunities does an increase in interest rates have for businesses?

A brief digression on the management of the monetary policy by central banks is dutiful. The rise in interest rates is aimed at increasing the cost of credit provided by banks, which operate directly on the real economy.


Such an increase entails a greater burden of debt for businesses and households and is able to provoke two different attitudes: on the one hand, to accept the increase in expenses in order to meet the need for a capital increase, essential for business continuity; on the other hand, to consider postponing projects that require debt capital.


The second attitude could contribute to a slight reduction in demand and investments, with a moderate effect on the price of goods and services and on economic activities in the medium term.


To date, what needs to be considered is the complex macroeconomic environment on which the reversal of monetary policy intervenes, with the FED starting the rise of the fed fund rate as early as March 2022, while the ECB, just yesterday, announced the first rise of 50 basis points in interest rates, a stronger action relative to the one announced and evaluated by the Governing Council in light of "the new estimates on inflation risks".


Source: global-rate.com

 

The rise in interest rates affects public companies, individuals and households in various ways.


The increase in the cost of debt entails a marked revision of growth estimates, and companies are impacted not only by the general increase in prices but also by the slowdown in the economy and higher financial costs: the marginality of the enterprises is eroded from the greater operating costs, and from the greater financial burdens for those firms with an important relationship between debit and equity capital.


Understanding how to protect one’s own company from a new phase of destabilisation and uncertainty can turn into a psychological component to be leveraged, especially for SME entrepreneurs.


As a matter of fact, managing a company during these exceptional events can determine the need to support businesses along the path, to activate the right policies and actions.


This aspect is paramount for companies showing good business fundamentals and initiatives, which could face the economic turmoil aiming equally at the development of the business.


This is how the paradigm between debt and equity is taken up in the field of advisory services, to evaluate the trade-off between higher financial charges against new debt, or a partial dilution of equity to obtain capital.


What is happening on the private market is precisely the possibility for private investors to acquire shareholdings in companies by applying multiples lower than the values expressed in recent years, and to keep the investment in the portfolio for a longer time horizon, a scenario that allow investors to accompany the company outside the challenging macroeconomic context.





For the SME entrepreneur, however, the rise in interest rates makes it necessary to analyse the financial position, without ruling out a possible debt restructuring a priori: the debt structure, between short and long-term sources, as well as fixed and variable rates, represents a field of intervention where it can open up to scenarios of debt rescheduling, with the expectation of a longer duration in order to intervene on rates.


Managing businesses by considering and evaluating the operations and the tools that could be implemented, on the basis of multiple scenarios, becomes an essential exercise, both to fully understand the reaction of the industry to external events, taking mitigating actions in line with its structure and its exposure to these variables.


Ensuring that the company is not unprepared cannot be underestimated, and what have been said so far implies the need for operations aimed at stress-testing the business and its projections, carry out sensitivity analyses on the business plan which take into account possible scenarios, be they stagflation, slow deflation or moderate improvement of conditions in the coming quarters.


Incorporating macroeconomic conditions within business planning allows to get a complete picture about the possible impacts of rising inflation and interest rates on both cash flows and margins.


The proactivity of facing the challenges of the period presents entrepreneurs with new challenges, with the assessment of the most suitable actions to face the instability, focusing on the potential of their own initiative and transforming threats and uncertainty into opportunities, to drive the change and not just to embrace it.




 

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