To survive or thrive: 7 tips on how to make your business more resilient in a recession

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. 

4. Secure capital early when the future is unclear

Businesses should secure capital early and not wait until crisis strikes to take remedial action. Once a recession hits, credit and capital from commercial banks become much harder to secure. The entry of neobanks on the market and fintech startups have expanded lending options for small businesses, however these carry their own risks. Just last month, Volt announced it was closing down as they couldn’t raise the capital to keep growing the company. 

“Investment is all about the deployment of capital and choosing where you spend your expenses,” Trent says. You can have a look at appraising assets and how they might be used as collateral or renegotiate extended payment terms on existing loans. 

Back in 2008 when the Great Financial Crisis hit, there was a saying that “cash is king”.

“But there's also a suggestion with inflation that holding cash is not a great thing, because it's only going to go backwards in value. This depends on what your perspective is but it’s really about whether you are going to knuckle down and weather the storm and try to survive? Or if you are going to see it as an opportunity to thrive and be aggressively competitive,” Trent says. 

Since business loan interest rates often track with the Reserve Bank’s benchmark interest rate, it is expected that rates for many types of small businesses will also increase. So if you think your business will need capital, you can either apply for a loan now before interest rates go up even more, or start building your credit.

5. Cut back on expenses

While it’s important to cut back on expenses in an economic downturn, it is essential that you don’t compromise on the quality of your product. When deciding where to cut costs, it's helpful to start with those that are not visible to your consumers. You can look at ways that can result in big expense reductions, such as taking advantage of early pay discounts from suppliers, or shifting the mix of labor between FTEs and contractors. 

You can also reassess your inventory and decide whether to keep a low inventory, keeping in mind this could translate into lost revenue and affect customer relationships. Alternatively, you can start by phasing out the less profitable products or inventory that you can easily replace to increase your cash flow, all while you’re evaluating the supply chain and taking advantage of discounts and specials.

In many cases, a business’ working capital is of pivotal importance.

“Working capital refers to the measure of a company’s short term financial health and operational efficiency. It essentially measures the company’s assets over a their liabilities and provides insight into the overall liquidity of an enterprise i.e how much cash or cash equivalents it has at its disposal ,” Jimmy says.

“So to ensure that working capital remains an asset for you, you need to make sure that you have great oversight on both ends – dynamic reports like accounts receivable and the accounts payable. And no other system does that better than QuickBooks Online because you get both at the same time.” 

6. Master your craft and niche down

You can niche down your offering to only goods and services that are perceived as essential by your target market. This is because goods or services deemed essential have an inelastic demand. This is similar to how people behaved towards essential goods such as toilet paper during a recession. By narrowing your offering, you’d be catering to a specific targeted audience that is more likely to be loyal in supporting your business. However, you need to ensure that your product or service has a unique value disposition as it may alienate customers if not done well. 

7. Keep investing in your company. But be strategic about it.

During a recession, you want to avoid operational costs that do not generate revenue. This is why using the right technology can help you run the business better during challenging times, while also saving you money. You can automate some of your processes to prevent your team from spending time on non-revenue-generating activities. When used correctly, automation can help to recession-proof your operations without lowering customer service. Using automation can also reduce the risk of human error and enables you to shift your focus on your customers – which should be your number one priority in a recession. 

About our experts

Trent Yesberg is a registered BAS agent, QBO Advanced ProAdvisor and has a Certificate IV in Finance and Mortgage Broking. Trent started bookkeeping early in his career and had extensive experience in finance and banking roles before taking over his father’s business, Regional Business Services. As a member of QuickBooks’s Trainers Writing Network (TWN), Trent delivers face to face training, certification webinars and presents at QuickBooks events.

Jimmy Nguyen is a qualified accountant and a partner to DKM Accounting, which provides its services to Small and Medium-sized Businesses (SMEs) and manages their finances through Intuit QuickBooks software. Jimmy is also the founder of the social media agency, If & When, designed to help small businesses grow. 

Invest in advice from a ProAdvisor

When in doubt, consulting a ProAdvisor can make a big difference in how you can recession-proof your business against financial shocks. ProAdvisors are experts at managing cash flow and can help you plan ahead and guide you smoothly through difficult business decisions. You can use our ‘Find a ProAdvisor’ directory to find an advisor near you.