Are you ready for a fiscal cliff?

There has been an increasing level of talk about the looming potential for a fiscal cliff – the point where the range of government stimulus and banking support packages come to an end triggering a sharp economic downturn.

The concern is that if many of these support packages come to an end around the same time that businesses and households will be pushed rapidly into deep financial stress – they will fall off the fiscal cliff!

In recognition of this, there has been some indication that the transition to a post-stimulus economy might be eased. Banks have announced they will extend mortgage relief and the government has suggested it is working on a range of measures to aid the transition.

Whilst these will undoubtedly be welcome, there is no escaping the fact that stimulus and support packages will need to end. As Scott Morrison recently said, “when you’re burning through cash at a rate of almost $11 billion a month on JobKeeper, then obviously that’s not something you can continue….”

So whilst there might be some smoothing of the transition, the fiscal cliff is still likely to be a very steep slope.

What can, and should, business be doing to ensure they survive this looming downturn?

Prepare – 5 focus areas

Preparation will be key to survival and it needs to start now (if it hasn’t already). Below are five areas boards and executives can focus on to help them prepare for what might be ahead.

• Remove stimulus effect. As governments reduce the stimulus packages there is no guarantee that this will be offset by increasing economic and business activity. To get a sense of what this could look like, consider your current financial performance and determine what it would have looked like if the various stimulus packages were not available. For many businesses this will paint a very grim picture. Undertaking this analysis will give a good indication of a worst-case scenario and help highlight the underlying vulnerabilities in your business.
• Scenario planning. As well as looking at this worst-case scenario it is worth considering a few other likely scenarios. This could include some increase in activity or alternate levels of support. However, it is important to not fall into the trap of ‘paralysis by analysis’. There are many unknowns and each of these scenarios will only be reasonable estimate that can provide some general direction.
• Suppliers, customers and other sectors. Talk to your customers and suppliers to get a sense of how well prepared they are for any sharp downturn. Preparing your own organisation for changes will be of no use if a major customer or critical supplier suddenly falls over. If the risk of this happening exists, then now is the time to start preparing a ‘plan b’. It is also worth looking at what is happening in a range of other sectors and consider how that might impact your business.
• Review your organisation. In this period of relative stability, before the increasing uncertainty that will occur when stimulus packages end, take the time to step back and consider your organisation holistically. What is working well? What isn’t? What do your really need to change? What will you take with you into the future and what should you leave behind? What might your new strategic direction need to look like? Asking and answering these questions will help you strengthen and prepare your organisation for a range of possible outcomes. However, it is important that this review doesn’t just focus on the obvious or financial metrics. It should cover all aspects: governance; culture; strategy; organisation structure and processes; risk; and finance.
• Have a plan and prepare to change it. As the old saying goes – ‘failing to plan is planning to fail.’ This is still true, and it is important that you take the learnings from the above analysis and develop a robust plan to navigate the current and emerging uncertainty. However, it is also true that this plan will most likely need to change and probably many times. Whilst it is important to have a plan, it is critical that it is flexible and can be adapted to suit changing demands.

The expected changes to economic stimulus and support packages provided by governments and financial institutions will create significant disruption to business, the economy and individuals. Anticipating the nature and timing of these changes is difficult, however this doesn’t mean that sitting back and waiting to see what will happen is an option.

When the changes occur things will move rapidly. Those organisations that have taken the time to prepare now will be best placed to weather the storm and survive.