WITH ECONOMIC ACTIVITY SUBDUED, IT MAY BE PRUDENT FOR COMPANIES TO APPLY ‘FINANCIAL HYGIENE’ STRATEGIES. WE ASKED UHY PROFESSIONALS FROM ADVANCED ECONOMIES AROUND THE WORLD TO DISCUSS WHAT THIS MEANS AND WHY IT MATTERS.
The April 2024 International Monetary Fund (IMF) forecast talks of a ‘steady but slow’ global economic recovery that would largely be driven by growth in emerging markets. Its prediction for advanced economies was an underwhelming 1.7% growth in 2024 and 1.8% in 2025.
The pandemic may be starting to feel like a fading bad dream, but its economic impacts are still readily apparent. Around the world, central banks reacted to the soaring inflation of the post-Covid era with interest rate jumps, and borrowing costs remain well above pre-pandemic levels in many countries. Added to that, the world is experiencing a new era of geopolitical tension, ramping up the sense of economic uncertainty.
Against this background, and after several years of disruption, businesses in many sectors continue to struggle. To survive, they need to dig deep into stores of resilience, and exercise iron financial discipline. According to our experts, the businesses that endure in a subdued economy are often those that maximise cash flow while cutting costs and putting plans in place to grasp opportunities as soon as conditions improve. In other words, their operations have ‘financial hygiene’ at their core.
UNSTEADY ECONOMIC RECOVERY
Many advanced economies are struggling with stubborn core inflation and interest rates that remain well above pre-crisis levels. But different countries face different challenges, and some are emerging from the post-Covid downturn more quickly than others.
“The New Zealand economy slipped into recession in the December 2023 quarter with a per capita contraction of -0.7%,” says Sungesh Singh, managing director of member firm UHY Haines Norton (Auckland) Limited. “Very weak or negative economic growth is expected to continue throughout 2024 and into 2025.”
Spain has avoided recession and can expect modest growth in the next two years, according to Joseph Fay, managing partner at Spanish member firm UHY Fay & Co. “Even though GDP growth in Spain has been revised upward (from 1.5% to 2.1% for 2024), it is expected that the economy will be weighed down by certain factors, the first being the impact of interest rate hikes during 2023, which take a long time to filter through.”
“Ireland is likely to recover to some extent from a difficult 2023,” says Alan Farrelly, managing director of UHY member firm UHY Farrelly Dawe White Limited. “Irish inflation would seem to be under control and expected to run at 2.2% in 2024. Our economic growth is expected at 2%, bouncing back from negative growth in 2023 of 1.9%.”
The US has proved one of the most resilient of all developed economies, with growth forecasts of 2.4% for 2024 as a whole. But here too, significant challenges remain. “Economic progress in 2024 and beyond is challenging to forecast and is heavily dependent on how the world navigates the various economic, geopolitical and social conflicts it faces,” says Howard Foote, managing partner for US member firm UHY LLP’s New York office. “Interest rates and inflation are the most significant concerns. The situation is among the most challenging that businesses and individuals have had to navigate in recent times.”
FINANCIAL WELLBEING
Against this background, businesses have to continue to create or sell products, provide services and make enough UHY GLOBAL July 2024 11 money to pay staff, suppliers and bills. They also need to be in a position to spring into action when opportunities arise. This can be diffi cult in a tough economic climate, but it seems part of the solution is to practise financial hygiene.
“Financial hygiene is the series of practices and behaviours that individuals, businesses, organisations and even governments need to adopt to maintain healthy financial wellbeing,” says Howard. “It involves tasks such as budgeting, saving, investing wisely and managing debt responsibly.”
Sungesh agrees, adding: “It is the policies, processes and habits of an organisation that ensure that a business maintains its finances in a healthy manner. For example, it includes efficient record keeping, cashflow management and accurate forecasting and budgeting.”
In short, financial hygiene ensures businesses have the money they need to operate effectively, both today and in the future, without piling on debt they might find hard to service. “The more they exercise financial discipline and hygiene, the more resilient companies will be while economic activity is subdued,” says Joseph.
“Yes, for our clients it is the same,” says Alan. “Financial hygiene as we see it is good business management, including keeping proper books and records that allow management to make informed decisions.”
AREAS OF FOCUS
Within the broad area of financial hygiene, there are certain factors organisations need to focus on to promote resilience. Maintaining cashflow is essential, and businesses need to keep tight control of incomings and outgoings. This is especially true during an economic downturn, when inflows tend to reduce. When that happens, savings may need to be made.
“Ensuring adequate liquidity to cover expenses and manage financial obligations is crucial,” says Howard. “This is a multi-step process but is vital in helping businesses ensure they are as resilient as they need to be. Certain best practices include forecasting cashflow on a regular basis, invoicing promptly and managing receivables to make sure you are receiving payments when they are due.”
Sungesh adds: “Maintaining cash reserves can keep core business intact during a slowdown. Up to date management accounts can alert owners to declining profitability very quickly, allowing them to take action before the situation becomes irreversible. Also, companies need to keep a close eye on overdue debtors and be particularly careful about extending credit.” Alan agrees that current and reliable business information is key to resilience during times of economic uncertainty. “Managers need to remain calm and fully understand the underlying cashflow trends of the business,” he says. “Strong financial controls allow for good decision making.”
Larger companies tend to be quite sophisticated in these areas, but small firms often less so. “Smaller companies tend to lack a culture of monitoring cashflow, budgeting, and managing debt,” says Joseph. “It is important they develop that culture at a time like now, when keeping the core business afl oat becomes more challenging.”
For more information, contact Alan Farrelly, Managing Director, UHY Farrelly Dawe White Limited alanfarrelly@fdw.ie