The Ukraine-Russia conflict is rapidly reshaping macroeconomic Europe. The prices of raw materials are shooting up, which is not helping the already high inflation in Belgium and Europe. Rising wage costs and declining purchasing power are just some of the likely consequences, but no one can predict what this will bring in the long term.
While there is no ready-made solution to protect you as a business owner from the current uncertain macroeconomic landscape, we give you some to-do's that you as a business owner can get started with.
Consider a strategic stock
"Just-in-time delivery" was long the front-runner of inventory strategies. However, since the corona crisis, we have been facing global parts scarcity, be it bicycle parts, electronics components or food packaging. Consequently, companies today are once again turning to strategic inventories. Just-in-time (JIT) management leads to supplier dependency. A JIT chain is only as strong as its weakest link. And this weakest link is under even more pressure today.
Establishing safety or buffer stock leads to less cost efficiency. But it can partially protect you from price increases, component scarcity and variation in demand. It may therefore be worthwhile to consider whether building up strategic stocks could offer your company a (partial) solution in certain areas.
Review your contracts
Variable contracts will be subject to the current price increases anyway. However, it may be important to check whether you should reconsider the fixed contracts with your customers and whether they can possibly be opened up (unilaterally). Rising raw material prices cause a drop in gross margin if you cannot pass them on to the customer. In addition, a declining or negative gross margin is not sustainable in the long term.
Also, keeping prices artificially "low" can have a market distorting effect. If a competitor does not raise prices and artificially maintains them at a low level, other players are obliged to follow this strategy to a limited extent. In this way, a race-to-the-bottom can occur between competitors and companies will eventually face losses.
Good pricing is therefore of crucial importance. We recommend checking how pricing is currently done and what the possibilities are in this area for your company.
Analyze your cost structure
An important factor in the above focus is the cost structure. Pricing can only be done when you understand the fixed and variable costs and how they impact pricing.
A vertical analysis of the financial statements can lead to different insights.
Check the following:
- What costs are experiencing an impact from the war in Ukraine?
- Which costs are necessary to date and which can possibly be saved (temporarily)?
- Are there costs that can be passed on to customers?
- What is my break-even point?
Make a cash planning
Too many entrepreneurs still focus purely on profit or EBITDA to assess the performance of their business and lose sight of their cash flow. When a company faces a cash shortage and there are no funds left to pay invoices, it will inevitably lead to bankruptcy.
A cash flow analysis is important here. Find out what the cash "burn rate" of your business is. This determines how much cash you spend in a given period. If this figure is too high then you are at risk, if it is too low then you may not be investing enough and you are dealing with dormant funds.
In the next step, identify the "cash eaters." Important cash eaters are:
- Maintaining stock
- The balance of open customers
- Loan repayments
Identify areas that can be optimized:
- Can the stock strategy be changed?
- Is a sale-and-leaseback an option to free up resources?
- Can payment deferrals be obtained?
- Is refinancing of loans possible?
Attention to open customers
In times of uncertainty and price increases, it is not only important to keep an eye on your own financial reserve, but also that of your customers. Rising commodity prices will lead to payment difficulties anyway. As mentioned above, the balance of outstanding customers is a major "cash eater" of companies.
On the one hand, it is important to ensure that your company has enough cash. On the other hand, you have to make sure that you do not get carried away by the financial difficulties of your customers. Therefore, keep a close eye on your outstanding customers and start sending reminders or setting up repayment plans in time.
Keep on doing business!
We have only just overcome the corona crisis or a new challenge is thrown in our path. Don't be tempted into defeatism, that won't help anyone. The European economy has already proved on several occasions that it can take a beating and will also come back from this setback.
Consequently, the most important to-do we want to give entrepreneurs is:
Continue to be entrepreneurial and remain ambitious, but with some attention to the current (uncertain) macroeconomic landscape.
Do not hesitate to contact us here contact us with questions.
Do you still wish to have a conversation about the impact on your business? Then make an appointment here with a pro Strategic Expert!