With the cost of living soaring and a potential recession knocking on our doors, it’s no wonder that business owners are turning to their Chief Financial Officers (CFOs) for advice and support. After all, CFOs are strategic thinkers and financial experts. If anyone can navigate a business through dark times, it’s them.
So, where does that leave you – the CFO currently reading these words and feeling the pressure mounting on your shoulders?
What can you do to prepare for a financial crisis?
In this article, you’ll learn about the most common warning signs that there’s a financial crisis looming and how to prepare for one as the CFO of a company.
Topics covered in this article include:
- What is a financial crisis?
- What are the signs that a financial crisis is on the horizon?
- How can CFOs help businesses prepare for a financial crisis?
What is a financial crisis?
A financial crisis hits when asset prices experience a steep decline in value. This is often paired with both businesses and consumers struggling to keep up with their debts and financial institutions experiencing a significant shortage in liquidity.
Financial crises can be extremely stressful and ominous times. Often, a financial crisis is preceded by signs of an economic boom. Overextension of credit to borrowers is usually on the cards and after the financial crisis hits, you can expect a wave of economic recessions ready to take its place.
8 signs a financial crisis is on the horizon
You don’t need a crystal ball to predict a financial crisis. There are often identifiable signs that such a crisis is on the way. And if you know what to look out for, you can prepare for the aftermath and make strategic decisions to ensure your business survives.
Here are eight signs that a financial crisis or recession could be on the way:
1. Stock market crashes
One of the best ways to predict a recession or financial crisis of any kind is via the health of Wall Street and the stock market. It’s a reliable indicator of just how well (or unwell) the economy is performing. A flourishing stock market is a really good sign. But if stock prices are low across the board with very little sign of recovery, it could signal an approaching recession.
2. Reduced bank capital
Banks struggle to absorb losses during a downturn. If one or more of the ‘big banks’ fail, it could have a domino effect of negative implications across the economy. Setting measures in place to deal with a possible banking crisis is one of the best ways to try and prepare for such an event.
3. Increased private debt
Secured lending on an asset that is overvalued is a potential warning sign of a financial crisis looming. Increased rates mean that businesses and consumers are giving up a portion of their income and finances to pay that interest. This means they’ve got less money in their pockets to spend or invest. Paying off their private debts becomes the priority and spending and investing move down the ladder of importance.
Sabrinthia Donnelly
4. Rising inflation
Whilst some level of inflation isn’t always a bad thing, a lot of inflation is not good. Rising inflation leads to more expensive borrowing. This then escalates and makes businesses less likely to borrow money or invest in new software, equipment, or people.
Currently, inflation remains elevated at 9.1%, which is the highest in four decades. Could this be a warning sign that a recession is on the way? That remains to be seen.
5. A drop in real estate
With rising interest rates and mortgage rates in 2022, the housing market is starting to slow down as potential applicants hold out in hopes of lower rates shortly.
A decline in housing construction and sales is a clear sign that a financial crisis could be on the way. CFOs should pay close attention to real estate, whether they’re in the industry or not.
6. A bank run happens
A bank run is like when you see a flock of birds fly away from an area just before a storm hits. Similarly, just before a recession comes tumbling in, many customers will often deposit their money from their banks. They do this over rising concerns that if they leave their money in the bank, it’ll lose value. So, they withdraw their funds and deposits, which can lead to banks potentially struggling to cover the withdrawals.
7. Increased oil prices
In the past, periods when oil prices went through the roof, have led to times of financial crisis or recession. Keep in mind that increased oil prices don’t always mean that there is going to be one. However, it’s worth keeping a close eye on those rising oil digits in the United States and other countries around the world.
8. An inverted yield curve
Inverted treasury yield curves might be a sign that a recession is coming. Yes, treasury bonds are usually very reliable in terms of a long-term investment choice. However, when you notice an inverted yield curve happening, it’s time to get your ducks in a row ASAP.