How to Protect Your Profit Margins, Recession or No Recession
18 October 2022 |
The C2FO Team
Avoid the worst of any dropoff in your profit margins. Here’s how.
In the views of many experts, recession isn’t just coming for Europe. It may already be here.
According to a recent survey of CEOs by the Conference Board, 99% are preparing for a European Union recession over the next 12 to 18 months.
Bloomberg Economics predicts that Europe will enter negative growth in the fourth quarter. The base case is for a contraction of 1% in gross domestic product (GDP), though the economy could contract 5% if the energy picture deteriorates. That would be comparable to the 2009 financial crisis.
S&P Global Ratings predicts the UK is already in a “moderate” recession that started in the second quarter of 2022 and will last for four quarters.
Christine LaGarde, the president of the European Central Bank, is forecasting negative growth for four quarters starting in the fourth quarter of 2022, though she has stopped short of predicting an official recession.
Recessions put serious pressure on businesses’ margins, but there are several options for mitigating the worst of the impact through C2FO.
Once implemented at scale, C2FO’s platform can help enterprises improve gross margins by up to 55 basis points on average.* This would significantly offset the likely margin compression that lies ahead.
Before digging into potential solutions, though, it might be helpful to talk about the economy as it stands now and what led up to it.
Recovering economies run into runaway inflation
Right now, companies on the STOXX 600 are enjoying a forward 12-month net profit margin of 10.1% — a record high. Real GDP also grew in the first half of the year as the world emerged from the worst of the pandemic, the European Central Bank reported.
Eventually, though, European countries began suffering from runaway inflation, hitting 10% by September. Prices have jumped sharply in the food and energy sectors because of the Russia-Ukraine war.
Economists are worried that, as a result, any recession that happens will last longer and cause more pain.
Recession-proofing your margins and supply chain
When a recession occurs, a few things happen. Sales and revenue will soften, and as a result, profit margins typically shrink. Cash flow tightens. Credit costs more and, in some cases, becomes unavailable for smaller companies.
For larger enterprises, there is also a higher risk that your suppliers will go out of business. In situations like this, dynamic discounting can help you maximise the impact of your funds and strengthen your supply chain.
You use your cash on hand to pay your invoices early in exchange for a small, customised discount from your supplier. (This type of early payment is a cornerstone of C2FO’s platform.)
There are several benefits to this approach. For starters, by using your own cash to pay invoices early, the discount you receive is essentially a risk-free return on your funds.
Most asset classes, including bonds, have been volatile these past few months due to the uncertainty in the markets. With C2FO, you can set a target return for your cash, and you can tie that target to benchmark rates, so as rates rise, so do your returns.
In a recession, though, some enterprises may prefer to hold on to their cash instead of using dynamic discounting. That doesn’t mean they can’t pay early, though.
Instead, these companies can use supply chain finance, or C2FO’s powerful version of it, Dynamic Supplier Finance.
A third-party lender or financial partner pays your invoices early on your company’s behalf; your supplier still offers a discount in exchange for early payment. You then pay the lender, usually on the original due date, though some enterprises may negotiate a later due date in exchange for a fee.
Accelerating payment is one of the best things you can do for your suppliers. You give them access to working capital quickly, so they can continue to pay their operating expenses, without taking on debt or shouldering the cost of interest.
During tough economic times, that can be an important lifeline for smaller businesses.
The bottom line
None of this is intended to make recessions sound like a simple problem. For many smaller businesses, an economic slowdown is an existential threat. Even the survivors can walk away with lasting damage.
But forewarned is also forearmed. By adopting tools like dynamic discounting and Dynamic Supplier Finance now, companies can bolster their supply chain and continue generating healthy profits.
* Source: Aggregated C2FO customer data