A perfect storm is currently brewing in the wake of the COVID-19 pandemic. Soaring energy prices, supply chain disruptions, labour shortages, an increasingly high cash rate (currently at 1.35 per cent), and inflation expected to hit 7 per cent by end of this year – are all signs of a weak economy.
In the 2022 financial year alone, Australia recorded 3,917 liquidations or administrative appointments across all industries, with the construction sector accounting for 28 percent of all insolvencies.
For small businesses specifically, an economic downturn can be more damaging and extensive. Research has shown that almost 75 per cent of businesses experience a decline in revenue and profits during a recession. So how can businesses better manage their risk appetite?
“This is a glass half full vs half empty situation. Many small businesses might not be too sure how to proceed because they’re either operating on a month to month basis, or they’re breaking even, or they're in a really good business position but they’re nervous that things could change,” says Trent Yesberg, Bookkeeper and Registered BAS Agent at Regional Business Services.
But, businesses can still be profitable in an economic downturn through a combination of good planning and smart revenue-preservation strategies. Here are 7 tips that small businesses can take onboard:
1. Focus on your customers
Rather than seeking more customers, focus on meeting the needs of your existing customer base. Not only is this less costly (repeat patronage and no increased spend on ads), happy customers will act as ambassadors for your business.
So, having a clear understanding of your existing customers’ needs and how these change during an economic downturn is key. It is essential to listen to your customers’ challenges and changing needs and be aware of how their buying habits are shifting.
When this happens, you may want to alter your offering to keep meeting your customers’ needs. For example, this could be adding a local delivery option, or creating an online store to make your product offering more widely available. A great example was how activewear brands offered a wider range of athleisure/casual loungewear during lockdown as more people stayed at home.
Pivoting your product offering can help you recession-proof your marketing strategy, put your business in a better position and preserve your revenue.
2. Build an agile workforce with recession-proof skills
Change is inevitable so the ability to be flexible, pivot and adapt to a new environment is key to surviving an economic downturn. When resources are scarce, having a tech savvy workforce with the right technical and communications skills can help you keep the ball rolling. Investing in training and upskilling your staff can help you achieve this goal.
“In saying that, we also need to acknowledge the current labour shortage in Australia,” Trent says. Just last month, the Australian Bureau of Statistics announced that 31 percent of Australian businesses are struggling to find suitable workers. This is even more the reason why businesses need to upskill their current workforce.
“The recent 5.2 percent increase in the minimum wage announced by Fair Work Australia, is also an indication of how costs will just keep increasing due to inflation,” Trent says.
“However, one thing you can control in a recession is your pricing strategy – whether that’s market appropriate, or ensuring that you're making a profit upfront when you're setting prices for your products, goods and services.”
3. Create a cash flow plan
When you’re expecting tough times ahead, it is important to have a clear overview of your financial position. You can do so by developing a rolling cash flow forecast for your business so you can have an idea about what the next three months will look like. This will also help the management team identify any warning signs.
You can check your income streams against ongoing expenses and create a current cash balance. A good way to protect your business against a recession is by increasing the amount of cash holdings in your business’ portfolio.
“On top of the recession, we know that there's inflation, we know that interest rates are on the move, there are a lot of variables that are arguably out of your control. So, having a good cash flow allows you to make decisions with some elements of forecasting. It provides some clarity as to what you should be focusing on,” Trent says.
Jimmy Nguyen, accountant at DKM Accounting and member of the QuickBooks’ Trainer Writer Network (TWN) further describes a cash flow projection as an indicator of your balance position and how much physical cash will potentially be coming in and out of the business.
“A cash flow projection helps you pre-plan your outgoings, your expected revenue, put in buffers for surprises and allows you to work with your management team, or your board on what type of investments you can make without breaking the bank,” Jimmy says.
So, if you've created a cashflow forecast and found yourself in a very poor position, this could be a good time for you to decide whether it is better to spend and reach into your asset reserves, or if it is a better time to apply for a loan and free up capital that you might not otherwise have.