Predicting the future. Not a job for the faint hearted these days. Certainly not in the comfort zone of an accountant.
What’s more, the economic and geopolitical drama of the last year has impacted those across the sectors very differently.
Many in the tech, life sciences, healthcare and energy sectors continue to enjoy momentum, riding a wave of progress, while much of the business to consumer economy are being hugely challenged by the double whammy of the cost-of-living crisis, as their bills rocket in tandem with shrinking consumer spending.
Nonetheless, there is common ground, so here goes with my predictions for the business issues that will be front and centre on the agendas of privately owned businesses in 2023:
Cost reduction and tech transformation
This year cost reduction is not a greenfield site. Many of the quick wins and tactical moves have been made during previous tough times, especially taking the learnings from Covid, meaning some businesses must now commit to longer term and more complex strategies, and in some cases unpause investments, accepting they need to progress, despite the uncertain environment.
In fact, transformation plans, mostly of the back office, are progressing in larger numbers than might be expected, in part because they have cost reduction or efficiency objectives. For example, automating elements of the finance function to remove manual tasks. Of course, often the objective is more than cost saving; it also achieves better outcomes. In this instance, automation delivers greater accuracy and one version of the truth across the organisation. Such improvements explain the commitment to investments in new systems for making businesses work better, for example Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP). But there are impacts of transforming in tighter times. While it’s difficult to change the scale of plans, digital transitions are being planned in bitesize chunks at some businesses rather than a wave of transformation, as management puts careful thought into how they balance working capital needs versus medium term investments. An under-recognised consequence of tech transformation is that it can increase cyber vulnerability. Especially given the rise in cybercrime I’d like to see resilience being planned in as part of tech projects more often this year.
Other areas businesses will be looking at hard from a cost point of view are procurement and contracts. Contract reviews will be on the rise as clients check they are not overpaying, whether better terms can be negotiated and that suppliers adhere to terms and conditions. Some finance functions will explore tax incentives more than before, to squeeze every bit of value from an investment, making the most of any Government incentives.
On the other side of the equation, this year will see increasing numbers of companies pass on the price rises that they’ve been shouldering for some time now and can do so no longer.
Macro headwinds and increased interest rates have put more caution and cost into the debt markets. Lenders will continue to support good borrowers and deals, but all businesses, even those performing well, should expect greater scrutiny and conservatism in funding conversations and the possibility of more restricted and expensive funding. Those in more challenged sectors or with more constrained balance sheets could also see increased pressure on liquidity and financial covenants, which may lead to a need for lender support to preserve access to funding and headroom or to support year-end going concern assessments.
These conditions mean robust business plans and effective funding strategies will be critical to accessing funding and may impact on the flexibility and cost conditions. Preparation will be more important with the onus on businesses to communicate their ability to maintain growth, withstand economic challenge, or differentiate from peers. Funding strategies should also retain optionality and fall backs to withstand changes in market conditions or lender behaviour.
ESG will continue to be increasingly important to funding conversations, and importantly provide opportunities to harness increased value for a business’s wider ESG strategy, but expect increased lender focus on standardisation and stretching targets to mitigate accusations of ‘greenwashing’ … on which note.
ESG and talent
This strategic imperative is going nowhere. Energy supply issues are ensuring the Environmental part has the highest profile but the impact of regulation will also lean on private businesses in a supply chain or with ESG linked funding. They can expect commercial pressure to provide science based targets and verified assurance of their achievement, before the year is out. Opportunities from ESG actions will be reaped too, as those able to articulate their plans will benefit from customer and talent attraction, while investment payback times speed up on energy saving measures or shifts to renewable power, in the face of rising energy costs.
We will see increased focus on the Social element during 2023. People and purpose sit within this area and will be critical in the context of attracting and retaining talent, against a confusing backdrop of higher demands from employees in a world of increasing unemployment. Employers will put more emphasis than before on keeping their talent through the downturn and even protecting it from the worst impacts of inflation. Reskilling and the extent to which this is the role of business will be an ongoing conversation. Growing numbers of companies are going to accept recruiting and retaining colleagues with the right attitude or soft skills then training or arranging for the training of them in the technical skills needed.
Resilience and decision making
Those leading private businesses are entering the fourth year of significant challenge, where repeated black swan events have been launched onto the CEO’s table. It has taken everything some have to give in order to keep running their enterprise, maintaining responsibility for employing people, taking risks to stay in business and changing what they do and how they do it in the face of Brexit, pandemic, the impacts of war, flooding and other climate events, extreme price rises and recession. So, I want to acknowledge that 2023 will further test personal as well as business resilience and management should look after their own, as well as their colleague’s, energy and mental wellbeing.
Covid has been a training ground for operating amongst unknowns. So, I hope many of those at the helm of private businesses will be more comfortable than before with not knowing all the impacts and not having all the answers. They will have learnt about themselves as a leader during the pandemic and have understandings they can continue to draw on, finding the energy to help others in their organisation too. Those in private companies can feel a great responsibility for stewardship; not letting down those who came before, protecting loyal employees and those who hope to come after. In this position one of the hardest challenges is to keep making decisions without the comfort of stability. While accepting all the facts won’t be known, it is sensible to seek the best data possible to inform decisions. Generating valuable insights is a reason for pressing on with tech investments that have data generation objectives. In an uncomfortable situation, take comfort from calling on the best information possible.
There will be growth, achievement and innovation in 2023, just as there were in the previous challenging years. Many private businesses will successfully work towards the big picture while adjusting the steps they take along the way. Our private businesses have demonstrated year after year how resilient and adaptable they are and this will be another year where that premise is tested.