Australian Companies Are Delaying Key Decisions Because of Economic Uncertainty – But Is This Strategy Actually Increasing Their Risk?

For a country famous for its stable politics and economy, Australia is facing a rare moment of uncertainty.

After a disappointing election result for the Coalition, the government’s flagship policy of lowering company tax is in doubt, and concern over the viability of the latest budget has also led to Standard & Poor’s revising Australia’s credit rating outlook. The agency warned that the election outcome had weakened the likelihood of an improvement in budgetary performance, and that it could lower the AAA rating if the situation didn’t improve[i].

The problems aren’t just domestic: with further global uncertainty fuelled by Brexit and warning signs about the sustainability of the Chinese economy, the IMF is warning that the risks to global financial stability have increased[ii].

But should these potential risks cause you to delay key decisions? In most circumstances, we have found that the certain risk of a delayed decision far outweighs the potential risk of fluctuating economic circumstances, and that businesses are better off taking action.

Risk…Or Opportunity?

Although the media often focus on the negative stories, there are many positives for the Australian food and beverage industry:

Favourable Exchange Rates Provide Boost to Exporters

In January, the Australian dollar dropped to a seven-year low of US68c[iii], and although it has risen above US74c since then, the exchange rate is still significantly lower than it has been for much of the last decade. This low value of the Australian dollar provides a significant boost to businesses that are, or have been exploring, exporting their products to other countries.

Could currency hedging or trade credit insurance give you the confidence to push forward with that export opportunity?

There Has Never Been a Better Time to Invest in Your Business

The cash rate remains at a record low of 1.75%, far below the 4.89% average for 1990 to 2016[iv], and could drop further. It has never been cheaper to borrow money to invest in your facilities and services, so if you’re considering expansion now would be a good time to make a decision.

Could delaying cause you to miss a great opportunity for expansion?

Putting Off a Decision for Possible Future Marginal Gain Gives Your Competition an Edge

Although the cash rate is at a historic low, major Australian banks forecast a further cut to 1.5% by 2nd quarter 2017[v].

But is a possible decrease in the cost of borrowing worth a significant delay in key decisions? Almost certainly not.

If your competitors make the decision to expand, they could claim the market share that could have been yours. In this case, the cost of delaying the decision would far outweigh the benefit you would gain from lower interest rates.

If others are delaying, could this be an opportunity to take action?

Would a Company Tax Cut (or other change) Actually Affect Your Decision?

When pressed, many businesses realise that their decision wouldn’t change, even if they had a crystal ball and could see what would happen in the future. For example, the possible reduction in company tax rates is creating uncertainty – but would a cut from 30% to 27.5% and eventually to 25% actually make a big difference to your long-term strategy?

Delayed Decision Making is a Symptom of an Inadequate Risk Framework

Delayed decision-making is a sign that your risk framework isn’t adequate. Your basic risk framework should cover the dangers of political and economic uncertainty, as well as the impact they could have on your business objectives. With this in place, there is less need for a delay in decision making because the risks are understood and managed.

F or many businesses, an irregular or nonexistent risk review process is the cause of this inadequacy. The risks your business is exposed to are constantly changing, and your risk framework should reflect this.

Is a basic risk framework in place for your business – and is it reviewed regularly?

What is my next step?

When you think about risk in your business, we find that many people consider risk in silos.  In the food and beverage industry, food safety and quality dominates our thoughts. People and financial risks generally get a high level of attention too.  But without an enterprise-wide assessment of risk, are we factoring in issues such as political uncertainty and economic considerations?

The first step in this process is to consider how your business thinks about risk.  If it’s in silos, we need to take a step back and think about risk more holistically.  With a risk framework, you’ll make informed decisions more quickly, enabling you to capitalise on opportunity and capture value for your business.

If you want to maximise the value you can add to your organisation, then complete our Risk Maturity Survey.

Upon completion of the survey, you’ll know where you sit regarding risk maturity, and we’ll provide you with some advice around next steps.

[i] The Guardian – Standard & Poor’s lowers Australia’s credit rating outlook to negative – https://www.theguardian.com/business/2016/jul/07/standard-poors-lowers-australias-credit-rating-outlook-to-negative

[ii] International Monetary Fund – Global Financial Stability Report – https://www.imf.org/external/pubs/ft/gfsr/

[iii] Xe.com – USD per 1 AUD over 10 Years – http://www.xe.com/currencycharts/?from=AUD&to=USD&view=10Y

[iv] TradingEconomics.com – Australia Interest Rate 1990-2016 – http://www.tradingeconomics.com/australia/interest-rate

[v] Sydney Morning Herald – RBA will be forced to cut interest rates to 1 percent or lower, Macquarie says – http://www.smh.com.au/business/markets/rba-will-be-forced-to-cut-interest-rate-to-1-per-cent-or-lower-macquarie-says-20160519-goyr0c.html