Challenges for companies: changeability, uncertainty and black swans

An interview with a PKF expert (Grażyna Sadowska-Malczewska - Managing Partner at PKF BPO) was published on the website ican.pl.

The current macroeconomic conditions directly affect the functioning of enterprises, affect costs, generating wage pressure, threatening to interrupt supply chains and often causing payment gridlocks. What can companies that encounter black swans do? How to deal with them, advises Grażyna Sadowska-Malczewska of PKF Poland.

What are the current challenges for entrepreneurs?​

The greatest challenge is the enormous variability of functioning and economic uncertainty, which translates into business operations. The last three years have been very difficult. During this time, we encountered the famous black swans twice. First, the pandemic that shocked the functioning of society and the entire economy. Once we learned to deal with it, war broke out, and chaos and uncertainty reappeared. As a result, entrepreneurs have to deal with macroeconomic factors that are beyond their control: galloping inflation, a huge rise in interest rates, and currency fluctuations.

Is it possible to somehow protect against the risk associated with macroeconomic factors?

Yes, there are tools that make it possible in a way. For example, there are currency options, currency futures, long-term contracts with suppliers with price guarantees, interest rates can be hedged through derivatives.  These are just examples. There are many possibilities and each company can choose the ones that will best suit its specificity and type of risk. However, with such great volatility in economic conditions, the uncertainty as to the effectiveness of hedging will continue to exist.

How do macroeconomic factors affect the areas of the company's operations?

Entrepreneurs don't work in a vacuum. Rising inflation causes rise in prices. Rising prices cause wage pressure. It is natural that people, wanting to live at an unchanged level (as before the price increase), go for pay rises. Increases cause entrepreneurs to raise prices in order to maintain profitability. Costs go up and the pressure on wages comes again. Vicious circle. This is exactly what managers are now facing. Inflation causes difficulties in restoring assets. The profits retained in the enterprise from previous years may therefore not be sufficient to cover development and even replacement investments. For companies in which currency flows are a significant factor, the appearance of unfavorable changes in the currency market will be a powerful threat to their liquidity. On the other hand, for companies relying to a large extent on foreign financing, an increase in interest rates means an increase in financial costs. It is then more difficult to maintain creditworthiness, which puts companies at an even greater risk of maintaining liquidity.

What other aspects affect the functioning of the company?

For example, changes in legal regulations, including tax regulations, but not only. Companies are burdened with an increasing number of legal obligations that require them to devote a lot of time, hire experts, use the support of consulting companies, purchase appropriate applications, etc. It all costs money. Even the upcoming elections cause uncertainty. Election programs are full of promises, and for entrepreneurs it is not known which of them will eventually enter into force and what consequences they will bring.

From what you are saying, it appears that nowadays, in order to manage a company, one needs a great deal of knowledge. Or employ a team of experts.

That's true. In order to be able to protect yourself from the negative effects of events or simply prepare for them properly, you need knowledge in many areas, not only in the industry in which a given company operates. Knowledge in the field of macro- and microeconomics, finance, law, taxation, accounting, management accounting, controlling, HR, human resources, payroll, and even IT is also necessary. It is hard to expect that one person, even the best manager, will have such knowledge. Large companies usually have experts in all these fields on their teams. The situation is worse for companies from the SME sector, which usually cannot afford to employ such a group of people.

What, then, can medium and smaller entrepreneurs do to secure the functioning of their business?

I recommend that such companies find a proven and trusted business partner who has experts in many fields in their team and use their support. The experience of our clients shows that such cooperation with one consulting company, providing access to the knowledge of experts in all the necessary areas, is very effective. In this way, the company gains a trusted business advisor who knows it inside out.

What topics are entrepreneurs reporting to you currently?

Since the outbreak of the pandemic, there has been a noticeable increase in the number of companies approaching us not with one specific topic, but with problems relating to many areas at the same time. Many organizations feel that the current uncertainty is a threat for them that they may not be able to cope with on their own. They're not even sure how it will affect their business. That is why we first help them understand and estimate the risk, indicate possible belaying methods and suggest chances. Many customers notice the need to increase efficiency, including through changes to internal processes. In some companies, the priority is to secure financial liquidity, i.e. to accelerate the turnover of assets in such a way that the increase in cash is sufficient to cover liabilities. This issue can be considered in various aspects, but tailored to a given company. It is worth answering the following questions: Is the contractor debt repayment process fast and secured? Are fixed assets effectively used? Is the funding cost optimal? Is inventory rotation adequate and which aspects of the company's operation will be significantly affected by volatile exchange rates and interest rates, and how can you protect against it?

Responding to the needs of our clients, we propose solutions that require competence in many areas and real multidisciplinarity. We often start with an audit of processes in a given organization, and then, together with the client, introduce changes to corporate processes, regulations, bookkeeping, management accounting, controlling, tax settlements, HR matters etc. We even help to choose the right tools, for example those supporting the automation of processes. In the case of companies that need support in conducting acquisitions or restructuring, raising capital or developing a new strategy, we delegate a team of experts: lawyers, financial auditors, accountants, tax advisers, management and IT experts, analysts specializing in valuations and acquisitions.

The macroeconomic situation is not optimistic, but as I understand it, do you think that it is possible to get out of every crisis unscathed?

Let us remember that "after the night comes day, and after the storm it is calm." Crises have been, are and will be. The most important thing is to keep your finger on the pulse, be prepared for various scenarios and constantly monitor the situation.