KPMG poll reveals that BoC rate hike concerns are not the most pressing right now, but there are risks ahead
Things have been tough for Canadian businesses during the past couple of years and there are plenty of headwinds lining up to derail their recovery.
Despite the multiple issues for medium-sized businesses, the pandemic remains the single most-pressing concern of owners (17%), specifically pandemic fatigue, or continued uncertainty/restrictions.
KPMG in Canada polled 508 business owners in February and found that almost all respondents had some employees out of the workplace due to Omicron and around half were somewhat or greatly impacted.
The other top 3 concerns are availability of skilled talent (16%), and supply chains (15%).
Although at the time of the poll the Ukraine crisis was already unfolding, and it was expected that the BoC would begin rate hikes, geopolitics (7%) and inflation (8%) are towards the bottom of the list.
Paul van Eyk, partner and national leader of Restructuring and Turnaround Services at KPMG in Canada, explained that there’s a good reason why inflation as a risk is surprisingly low in the concern rankings.
"Most companies (81%) believe they can pass on rising costs to the consumer," he said. "But that's a huge question mark. It remains to be seen if companies can continue to pass along all these higher costs and if the demand will continue to hold in the face of rising costs. If they end up having to absorb them, their profit margins will tighten and for many, it could lead to a new set of challenges."
Rates rises still significant risk
While there may be bigger immediate worries for Canadian entrepreneurs, interest rate rises remain a significant risk to business.
More than half of respondents (55%) said that they would face "material, substantial, or considerable pressure on their business and cash flow" if the prime lending rate were to increase 1%, while one third (33%) said say a 2% increase above their current borrowing rate would put their company "at risk", create "significant challenges", or derail "growth or investment plans.
Most (94%) agree that high inflation will be around longer than expected and are building it into their operating models with 45% agreeing strongly, indicating they are indeed modelling for higher inflation.
Restructuring stigma
With 8 in 10 respondents having been forced to reorganize or restructure their operations due to the pandemic, and the same share saying there is still a stigma to financial difficulty and restructuring, there is reluctance to talk about it.
Fewer than a third said their company culture is open enough to discuss their financial challenges with external parties, such as lenders, accountants, or turnaround specialists.
Most business owners said they believe it’s harder to raise capital after a restructuring, but being guarded about financial issues can break a business, van Eyk warned.
"Yes, restructurings are difficult and involve tough decision making and uncomfortable discussions, but it is so important for a company and management team to recognize when they need to change their strategy and embrace and foster a turnaround culture before it is too late," he said.
He added that the sooner businesses address the financial difficulties they are facing, the faster solutions can be found.
"In some cases, it might involve trimming costs, in others, it might mean divesting assets or restructuring the organization to the ‘new normal’,” he said.
