Companies have a history of underestimating the urgency, scale, and breadth of actions required to manage and thrive in a downturn. According to a study of over 5,000 US enterprises over the last five downturns, companies saw sales decrease by 1% yearly, compared to 8% annual growth over the three preceding years. For most corporations, profit margins and overall shareholder return are also reduced. Weaker performance exposes businesses to the possibility of outright failure and the growth in investor activity, which has more than tripled since the last downturn.
Downturns often provide opportunities, and businesses must move beyond a defensive posture to seize them. Competitive volatility grows during downturns (for example, the rate at which companies enter or exit the Fortune 100 each year jumps by 50%), indicating an opportunity to capitalize on the downturn. Investment possibilities, such as mergers and acquisitions, typically grow more affordable. Some businesses also take advantage of the occasion to initiate significant internal reform.
Some organizations may need to take defensive measures to survive the recession, but CEOs must also consider the bottom line to prosper. The companies that expanded more during downturns also experienced higher post-downturn growth, suggesting that expansion during a recession has competitive advantages that continue to pay off. Companies must maintain a balanced “portfolio of bets” over several timescales and engage in R&D and innovation if they want to expand successfully over the long run. A downturn shouldn’t impact long-term growth potential.
Before even investing, it’s essential to learn about the company’s operations and financial status. Here are four actions that need to be taken care of, such as:
A company’s financial management reveals a lot about its ability to endure fluctuations in the stock market or unforeseen events.
The share price of a company with a long history of consistent growth will likely rise steadily in the future.
Strong dividends with consistent increases typically indicate a stable income source. Additionally, dividends sustain the company price if the market as a whole decline.
Risk factors tell if the company is having a tough time breaking into the market or if it needs financing soon.
A recession is a good time for positive cash flow companies to de-lever the balance sheet as interest rates tend to be lower before growth picks up again. Repaying debt at a lower borrowing cost will boost the company’s bottom line.
Corporates seeking risky investments increase their leverage multiples during the recession due to the lower borrowing costs. They often engage in carrying trades on emerging markets to magnify the returns.
M&A has become a significant aspect of many organizations’ strategies, with deal volumes moving upward for several years. During recessions, companies with poor capital structures should look to raising capital targets to acquire for horizontal/vertical mergers.
Most companies go defensive during a recession, but that creates a negative return on the overall capital available due to lower returns on cash balances (i.e., cash drag ). It’s better to plan better ROI alternatives for cash surplus rather than letting it sit idle on near-zero interest rate accounts.
With HighRadius’s treasury software, businesses can:
A $1.5 billion-dollar construction company faced these challenges:
HighRadius AI-Powered Forecasting provided it with the following results:
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Talk to our expertsThe HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.