With economic indicators providing a sober context for business activity, directors would be well-advised to avoid complacency.
The MSCI All-World Index of developed and emerging market equities recorded a drop of nearly a fifth in 2022 - the biggest fall since the global financial crisis of 2008. This seems to me a reflection of a cocktail of factors which have all turned negative at more or less the same time. There are some slightly hopeful indicators on inflation from Europe and the US, with the latest figures slightly down on previous numbers, but they are still high. It is to be hoped that they continue to improve as time passes.
These challenging conditions mean that in general terms there are tricky times ahead for directors as they adjust to the new normal. Although, as always it is worth bearing in mind that there will be opportunities for some to take advantage of if they are positioned properly.
But there is a more specific risk facing directors in the UK. During the pandemic the pre-existing UK rules on insolvency were made more flexible. Pre-pandemic it was a legal offence on the part of directors to continue trading when the key indicators about a company suggested that it was insolvent. This was loosened as part of a package of measures including suspension of the serving of statutory notices, and winding-up petitions for companies that failed to service their debt as normally required. They were exceptional times and they required exceptional measures.
However now the pandemic has entered a new phase where the worst is over, these relaxations have been removed and the old normal is back. Amidst a rising level of insolvencies experts are suggesting that UK directors have become too complacent and are reacting too late to the signs of impending meltdown. This is of course bad news for their businesses as early action might avert a crisis. It is also potentially dangerous for the directors involved as they once again bear personal responsibility.
Of course laws and pandemic measures taken vary from country to country, so the specific challenges of this post-pandemic period will differ on a national basis. But it does seem to me that there is an underlying global issue here. Many countries introduced more flexibility as part of their response to COVID, and this is likely to have impacted on the mindsets of businesses.
Understanding financial management also requires an understanding of human nature, a lesson I have repeatedly learned across my career. Accountants cannot provide true strategic value without moving beyond the world of balance sheets and cash flow statements. They must analyse and probe what the figures are telling them.
To some extent finance staff generally have to act as the conscience of the directors, or at least as an early warning system. An objective pair of eyes is invaluable when the economic environment is changing fast. It is our job to highlight risks as well as to suggest how they might be managed. Avoiding risks altogether is not an option, but taking them on blindly is highly dangerous, as some directors may be about to find out. This is indeed a time when risk everywhere is on the rise.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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