As companies enter 2017, the outlook for many industries remains challenging. Political instability, commodity prices and other factors can make forecasting and budgeting difficult, and shareholder concerns increasingly manifest themselves in activist campaigns.
In this climate, businesses can’t wait for a time of distress to assess and improve their finances and operations. A company may not have obvious financial stresses that require drastic change now, but management should avoid ending up in that situation – especially in sectors where growth is expected to be flat or down in the years ahead.
Long before they have to consider negotiating with debt holders or restructuring the business, company leaders can head off a crisis by diagnosing potential problems that often develop into major issues. This assessment can be the foundation for decisive and timely action that maintains the stability of a business, refocuses its corporate strategy and ultimately creates value for stakeholders – an approach that helps a company own success at every turn.
In many cases, there may be a trigger for this critical assessment – from some type of financial or operational concern to external pressures in a particular industry or fluctuations in the market. Regulatory changes, technological shifts and swings in business cycles all can turn a previously sunny outlook into something hazier.
Stresses such as these also can raise concerns among the shareholders of a company. Shareholder activism has increased in recent years and isn’t limited to any particular industry. In some cases, underperformance within the market or relative to peers is enough to spur certain aggressive shareholders to press management on a company’s strategy or financial structure.
Given the challenging outlook in industries such as energy, retail and others, companies should carefully review their finances and operations to ensure they’re in the best shape possible before a crisis develops. Senior managers and boards need to take this opportunity to ask themselves what their business does, how it does it and for whom.
Besides heading off a difficult situation before it’s too late, investing in a review of finances and operations and diagnosing any potential problems can improve a company’s position amid an uncertain industry forecast. Too often, companies remain in denial even as warning signs emerge.
This kind of diagnosis can take time, but it’s worth it to avoid running out of runway and ending up in bankruptcy court. Identifying signs of distress early and taking steps to mitigate them preserves options and value for all stakeholders, ultimately ensuring a company’s future.
Turnaround and Restructuring Leader, PwC US