How Businesses Can Adapt and Be Positioned to Withstand Shocks

Many business leaders felt optimistic at the beginning of the year: inflation was starting to cool, and the Federal Reserve may have considered pausing interest rate increases. But the latest consumer price index rose .4% in February putting the annual inflation rate at 6%.  

Despite looming economic volatility and high inflation, there is good news for businesses. Nearly 80% of CFOs report that their companies experienced revenue and profitability increases in 2022, a trend they expect to continue throughout the year, according to the 2023 BDO CFO Outlook Survey.  

So, what is concerning CFOs this year? Seventy-one percent of CFOs say supply chain disruption poses some or significant risk to their businesses in 2023, followed closely by economic volatility (69%), geopolitical disruption (68%), data privacy breaches (67%) and natural disasters (67%). All five of these areas have one thing in common: they are not typically within a business’s control. The differentiator of success is how each business adapts when trouble strikes, withstands the shock and ultimately pivots when necessary.  

Below are the top seven tactics leaders can use to create a more resilient business, based on feedback from our survey of 625 CFOs from companies with revenues ranging from $50 million to over $3 billion. 

1. De-Risk Your Supply Chain: Since before 2020, supply chain disruptions have been a common threat and this year is no exception, which is likely why it’s the top concern for CFOs. De-risking the supply chain comes down to optionality, redundancy and market proximity to your customers. Review your supply base for any overreliance on a single source or geography, then consider options to decrease the distance between where your products are produced and where they’re purchased.  
    
2. Make Strategic Digital Investments: Digital investments in innovation can create an outsized advantage and widen the competitive gap. For example, automation investments in repeatable work can streamline processes, leading to greater outputs. Strategic investments that improve the customer experience are key in good and bad economic times. Seventy-eight percent of CFOs plan to either increase or maintain their digital transformation investments throughout the year. 
    
3. Consider Cost Optimization: It’s important to note, cost optimization is different than cost cutting. Cutting is a short-term fix that can unintentionally jeopardize long-term growth. Optimization, on the other hand, offers a long-term solution to unlock value, generating ROI beyond savings. Explore options for cost optimization and select the tactics that work best for your specific organization.  
    
4. Invest in Your Workforce: For many companies, increasing headcount is no longer the top priority. Instead, they’re investing in their people by committing resources to upskill and re-skill their workforce. This is particularly true of thriving companies, 41% of which plan to upskill and re-skill workers over the coming year. Savvy CFOs are betting that these investments will help their companies remain agile during an economic downturn, when belt-tightening measures like hiring freezes may force them to do more with less. 
    
5. Focus on Your Core: Now is the time to divest in underperforming subsidiaries and focus on refining core services or offerings and reducing business complexity. You can start by analyzing your business activities. Once you pinpoint the highest and lowest performing sectors of your business, you can focus on investing and divesting accordingly.  
    
6. Consider Variabilizing Your Cost Structure: Fixed costs can be a liability in times of economic uncertainty. They also make it harder to scale up or down in response to demand. By eliminating low-value activities and overhead, you can increase your capital efficiency and financial flexibility. Consider revisiting your largest fixed costs by renegotiating variable payment terms with suppliers, outsourcing noncore business functions or shifting from asset ownership to renting for access. 
    
7. Approach Deals with Caution: Companies should expect a continued deceleration in dealmaking with only 16% of middle market CFOs planning an acquisition in 2023. High interest rates have also made M&A less appealing. If private equity or venture capital funds have a mandate to deploy capital, they’ll be looking for solid fundamentals and strong growth potential. The market also has a small number of companies considering going public. Now is the time to strengthen your company’s valuation for when dealmaking becomes attractive once again.  

2023 is proving to be a year to seek opportunity in volatility. We expect clear winners to emerge from this year’s obstacles despite the headwinds. Those who focus on strategic investment and long-term goals are well-positioned to see profitable growth.   

Eskander Yavar is National Managing Partner, Advisory at BDO.