While nobody has a crystal ball, it’s likely that factors including inflation, economic downturn, higher interest rates and money tightening, as well as lower markets will continue to play out in the U.S., U.K. and elsewhere in 2023. Their impact will happen in different ways for different businesses, so it’s important to break them down and think about their impact specifically for your business when forecasting and planning for the coming year.
No. 1, consider your own rising costs, such as spending with vendors for professional services — especially for those with whom you are going to sign a new contract, as there may be price increases that must be factored in. Then consider salaries: If general market costs for a type of talent is increasing due to inflation, then you don’t want to underpay and lose staff.
For product-based businesses, there are already supply chain issues happening. When combined with inflation, that could lead to excess inventory. You may still be receiving inventory that was delayed, and inflation may be slowing down how often and how much your customers are purchasing. Think through what’s going to happen to inventory levels, and factor in any necessary storage. There also may be discounts needed to get inventory to move more quickly.
On the revenue side, think about whether the price for your product or service should increase due to inflation. It can be a tough decision, and you want to understand how a price increase would affect your customers’ demand.
When considering an economic downturn or recession, thinking about the impact on your customers is key. What’s their financial position going to be, or how will it change as a result of the recession? And how do their own fears and wants and needs change? That will be important when it comes to trying to forecast what they’ll be doing with you as your customer — and the impact on sales. More broadly, consider whether the same type of customer will still want and need your services or products, and whether they’ll still be in a financial position to buy them. Downturns mean corporations and people are cutting down on spending. How will that affect your business? Once you’ve figured out the impact on sales, that will feed into the impact on revenue. Do you need to give discounts to keep sales going for that same customer segment?
Every sale comes down to a cash collection. Going back to the financial position, are your customers also going to be cash strapped and take longer to make payments? If so, do you need to factor in the need for more cash yourself? What does that do to your cash position?
Once you’ve seen the impact on sales, revenue and your cash position due to the recession, consider any investments you need to make. Are you investing in the right places, and do you still need to make any investment you have planned to make or already started making?
Higher interest rates and money tightening
Higher interest rates and monetary tightening are also going to have an impact on cash. Your cash position may already be lower if you are collecting less. Think ahead around whether you’ll need financing and where to get it. Setting up a bank line of credit or letting your investors know when you’ll need more cash is important to predict, because the cost of getting money will be higher.
Higher interest rates and monetary tightening will cause markets to be lower. And when markets are lower, companies are valued lower. So, if and when you need to raise money in 2023, the valuation of your company for an equity round will be affected by the market downturn and the higher interest rate. Think about the amount you can raise and the terms with this economic backdrop in mind. For those businesses that were thinking about M&A activity, there’s a lot less of it happening — and at lower valuations.
If you are a business planning an exit, then thinking about how much you can get for your business and when you can exit in 2023 will need to factor in what’s going on in M&A markets now. Conversely, if you are thinking about expansion, say with an acquisition, then it could be a good time to spot companies that are aligned to where you need to expand and get them at a good price.
All these external factors can lead to a lot of nervousness. Because so much is unknown, it’s a good idea to build two or three scenarios of what happens in various situations that are likely to occur for your business. That gives you a way to put your arms around the uncertainty and make some concrete decisions based on those possibilities. Keep in mind that your scenarios should not — and cannot — account for every potential thing changing; concentrate on the big-ticket items that will have the most impact to your business.
Planning these scenarios is an integral part of forecasting and creating a smart business plan for 2023, but it can also be a daunting undertaking. If you need assistance, please don’t hesitate to reach out to me to help you create meaningful scenarios, fact-based forecasts and actionable plans to successfully guide your business through what’s sure to be a turbulent 2023.