Economic downturns drive companies to readdress their competitive position and overall business model. Businesses that take proactive measures will transform and thrive when conditions improve.

Given current recession fears, ongoing inflation, and interest rate pressures, companies could be facing a myriad of challenges, including stagnant revenue growth, liquidity pressures, the loss of a major customer(s), or other factors that can be difficult to predict. Businesses must assess their capability to withstand financial and operational disruption and act decisively to mitigate actual or potential risks.

Three key strategic financial assessments can help determine if there are any cash management, financial/operational, and/or reporting areas of concern.

1. Cash Flow Assessment

Effective cash flow management is needed for a business to survive economic uncertainty. The first step of a cash flow assessment is analyzing the company’s cash flow forecast and assessing liquidity needs, including debt service. Furthermore, stress-testing model assumptions is imperative, as it can reveal potential vulnerabilities.

Next, performing the assessment will identify potential strategies to optimize and preserve working capital. This could involve tightening credit terms with current customers and implementing stricter procedures to evaluate the creditworthiness of new customers.

Lastly, this will involve assessing the lender reporting process and improving communication with key stakeholders. Transparent and timely reporting can build trust and facilitate better decision making.

2. Financial Assessment

A thorough financial assessment can reveal areas for cost-saving and strategic investment, helping a company remain agile and focused on growth. This will include an annual operating plan (AOP) analysis to determine the plan’s rigidity and effectiveness. A flexible yet robust AOP will help a company adapt to changing conditions.

This assessment will also include evaluating the need for any cost-cutting or strategic investments, as well as determining if the finance department is structured adequately to drive data analysis and decisions. It will focus on evaluating the organization’s ability to be agile and focus on strategy, business development, and problem solving.

3. Reporting Assessment

Accurate and insightful reporting is vital for enabling management to take timely and effective action when responding to economic changes. Assessing a company’s management reporting involves reviewing the current set of reports to determine if they deliver critical and actionable insights (both financial and operational) to management. That can include a review and enhancement of management dashboards to include KPIs that help focus on cash management, forecasting, and cost optimization.

The assessment will evaluate whether the company can shift reporting to an automated environment and assess any potential audit readiness and/or covenant compliance issues.

Engaging a third-party advisor can provide objectivity and expertise in performing these strategic financial assessments. Advisors bring experience and a fresh perspective, which can be crucial in identifying blind spots and uncovering opportunities for improvement. Their comprehensive toolsets and methodologies help to ensure thorough evaluations, and their independence helps in delivering unbiased recommendations.