The war in Ukraine, volatile European markets and currencies and challenges across China’s political and economic landscape are just some of the issues impacting almost every country around the world, including New Zealand. We are broadly an import economy, so this handful of issues playing out on the world stage is having a direct impact on our economy and on our businesses.
Domestic instability also on the rise
Political instability is leading to economic instability. Businesses are operating in a high-inflation, high-interest-rate environment – one that is extremely volatile and has ramped up very quickly. It is worrying that while the Reserve Bank and government both took actions last year to limit inflation, these have had no real impact.
Both external and internal costs are increasing as we see materials and people costs rising, resulting in margins becoming increasingly squeezed. Put simply, businesses are facing challenging times. And yet one-third of respondents to the BDO global risk landscape report said they are unprepared for the risks stemming from geopolitical tensions.
Focus on what you can control
Businesses cannot control what happens in the geopolitical sphere, nor can they control rising inflation or interest rates. But what they can control is their approach to managing risk. In a volatile environment when the conditions of doing business are changing daily, the only action businesses can really take is to understand and monitor the different risks to their organisation and know what controls are in place to mitigate those risks to an acceptable level.
Strategies business owners can employ to help manage risk include:
- Creating an up-to-date risk register
- Working out what controls you have in place to help you mitigate these risks
- Making actionable plans to improve where and how your business is protected against risk
Most importantly, the points above need to become part of the fabric of your business plan: your risk register and action plan should be a live document that evolves with your business and the risk landscape.
No matter your location or size, your business is going to be highly impacted by inflation in some way. If there is a risk that inflation might increase by a further 5% in the next six months, consider what your controls against that are. How much do you understand your costs, how detailed and regular are your cashflow reviews and have you undertaken any scenario planning to protect against different inflation projections? Once you have acted on some of these points, you can then reassess whether you have reduced this risk to your business to an acceptably low or manageable level.
Implementing the above points is a key way for businesses to take back control in what is a highly uncertain political and economic environment. Riding the wave of uncertainty is about accepting that there are many events entirely outside of your control, taking place all over the world, which are having very real impacts on your business and your ability to achieve your strategic vision. But even as you accept this, you can still take action.
The best way to protect your business from uncertainty is to build resilience into your organisation. Developing a strong risk management approach that enables you to stay up to date with changes as they happen is key. Understanding what the impact is to your business and knowing exactly what levers you can pull to lessen those impacts, is really the only way to ride that wave and successfully come out the other side.
David Pearson is an advisory consultant with chartered accountant and business advisors BDO Hawke’s Bay. He has a special interest in providing advisory services to the optometry sector and extensive experience assisting businesses within this sector. Contact David at firstname.lastname@example.org or visit www.bdo.nz