Cup Day winners and losers

Unfortunately, we all couldn’t back a winner on Melbourne Cup Day. However, we all could have tipped the Reserve Bank to raise interest rates. Will there be another rate rise in December? Potentially.

Interest rate rises and other current economic pressures will flow through to many businesses. This article identifies the industries impacted as we approach the Christmas & New Year period, and where we see pressure points arising.

Industries under pressure

Retail

Any industry heavily reliant on debt or discretionary spending is at risk of being impacted by rising interest rates and the current economic pressures. Retailers will be affected by consumers tightening their belts leading into the holiday period, resulting in reduced discretionary spending on goods and services that are not essential to people's basic needs.

Real estate

Although residential property prices have continued to rise during 2023, rising interest rates, tighter consumer lending practices, and more stringent debt servicing requirements may cool the ability of buyers, particularly many first-home buyers, to enter the market. These factors will result in reducing real estate demand, slowing property price growth, and impacting sales & financing costs for property developers.

Construction

Many builders have experienced financial difficulties during 2023 due to tightening margins and rising input costs. Over the summer months, building subcontractors will have heightened cashflow concerns as many of their workers take leave, leaving the employer without construction work to invoice, and weekly employee annual leave outflows. Whether subcontractors have sufficient cashflow reserves will become evident in the first few months of 2024.

High-growth technology & start-ups

These industries often rely on venture capital and debt to fund their growth. As the cost of capital increases, it will become more difficult for businesses in these industries to finance their growth.

Your business

Although your business may fall outside the above categories, every business faces current challenges, and today is always the best time to strengthen your business for long-term success.

How? Here are some actions you can take:

  • Maintain accurate and up-to-date financial records to monitor cash flow, identify potential problems, and make informed decisions with near real-time information.
  • Managing cash flow is crucial. This includes preparing, maintaining, & stress testing a budget, monitoring outflows, and keeping a close eye on your trade debtors and creditors.
  • Review your strategy. This includes exploring possibilities to pivot due to unexpected disruption, diversifying revenue streams to reduce spread risk (e.g. contagion risk if your primary customer fails), innovating product offerings, and discontinuing low-margin products/services/customers.
  • Invest in your people to help you grow your business. Key staff hires and training of existing team members can empower your business’ growth and resilience.
  • Maintain strong relationships with customers, suppliers, and your banker can allow for flexibility during tough times. Communication is key. And remember, their success is your business’s success.
  • Unlock cash tied up in assets by selling unutilised assets and more closely monitoring inventory holdings. Ask yourself, do you need to hold six months' worth of stock? Is three months’ supply more suitable?
  • Restructure your debt to meet your current business circumstances and cashflows.
  • Obtain the right advice when needed.

How we can help

BDO’s Business Restructuring team works closely with businesses, borrowers, lenders, and stakeholders to identify risks and provide tailored advisory solutions to navigate financial distress, operational challenges, and underperformance.

We have a strong track record of obtaining results for clients. You can take confidence from our proven process, backed up by careful planning, effective communication, and knowledge transfer to your stakeholders.

Our solutions include:

  • Working capital and cash flow modelling to identify working capital improvement opportunities that exist to release cash flow pressures.
  • Our Debt Advisory team can assist clients in sourcing the right finance option for their current circumstances.
  • Distressed M&A, working with our Corporate Finance team to conduct a fast-tracked, targeted M&A process to maximise the value of a business facing financial difficulty.
  • Pre-lend and independent business reviews to allow financiers to make an informed decision about their borrower, whether that be undertaking an assessment of the proposed borrower or reviewing an existing borrower.
  • Restructuring and turnaround advisory to stabilise a business and support decision-making, by identifying performance issues, cost-cutting initiatives, and revenue growth strategies.
  • Safe harbour advice for directors of distressed businesses where they are pursuing a course of action that is likely to lead to a better outcome than an insolvency scenario.
  • Formal insolvency engagements where other solutions are not viable.

For more information, contact our team of advisers.