Should Business Owners Worry About a Downturn?

With the Australian economy’s growth rate stalling this summer, many business owners are starting to worry that recession or at least a definite slowdown is just around the corner.

This may or may not be the case as there are some encouraging signs that the latest GDP figures are just a dip – but either way SMEs are right to be cautious, especially with the ongoing talk of one and potentially two interest rate cuts this year. Individual sectors wax and wane as well as the wider economy, and if you want to build a business for the long term you will certainly need to be able to weather a downturn or two.

The key to recession-proofing a growing SME is to be on a sound financial footing and have some flexibility both in your operations and your finances. The good news is that this is not too hard to do and those businesses that do weather a recession will likely enjoy rich pickings on the other side. This has been well proven during and after the Global Financial Crisis (GFC).

The answer, therefore, is that you shouldn’t worry about a downturn that may or may not happen as none of us are in the game of predicting such an event let alone when it may occur: but you should prepare your business, because one day it certainly will arrive.

Five Ways to Recession-Proof an SME 

Ultimately, when the prevailing economic winds turn against you there is no substitute for good, experienced management at the helm. If you’re a new entrepreneur, you may have to gain that experience as you navigate your first recession. Having one or two “grey haired” mentors, advisors or even board members who have been through such events in the past as invaluable sounding boards to have. If your businesses is well prepared in key areas that may cause stress on your business, that will be a lot easier. Those following five measures will not be a waste of time if the economy keeps on growing: they are also excellent ways of keeping you and your business focused whilst maximising growth and profitability.

1. Build a Great Team

As your business expands when markets are growing, it is easy to simply hire workers as and when you need them. However, if a recession comes and you are left with too many wages to pay, you will be far better off if you have concentrated on finding quality people and building them into a close-knit team. Don’t hire for the sake of hiring, during the good times. Employees who have a real connection to your business are invaluable at any time, but during a downturn they are much more likely to be flexible and agree to do different work or even cut their hours for a period in order to help out. Building a great team of people around you, also creates a great working culture and a sense of pride and responsibility from all.

2. Tighten Inventories

For those business that carry excess stock it is not great business practice, but in a buoyant market you can usually get away with it (especially if buying in bulk resulting be better pricing from your suppliers). The danger is that if things suddenly take a turn for the worse, you are out of pocket and may struggle to find buyers, especially if your competitors who are stronger than you decide to come out with price reductions simply to move stock so that they can “buy” market share. Nowadays there are many different software systems available to help tighten your inventory management, with real-time monitoring and forecasting, using a combination of established management techniques and clever software (which is usually not expensive), will go a long way in optimising your stock and the amount of money tied up in your inventory for longer periods of time than necessary. If you think your inventory might be too lax, resulting in overstocked item, now is the time to do a bit of research, pick the best inventory software system to help your business tighten this up (most are “off the shelf” and easy to implement) and then sell down what you can, especially the slow moving items and move to a more Just-in-time model or if that is not possible then at least have tighter controls to ensure your inventory turns over on a regular basis.

3. Strengthen Supplier Relations

Closely tied to inventory management is the issue of suppliers and how they will behave in a recession. There are two principal worries here: one is that you get into difficulties and need some understanding and flexibility from the businesses you buy from regularly; the other is that one of your key suppliers will go bust, leaving you in the lurch. By building strong relations when times are good, spreading your suppliers so that you are no dependent on one and being able to vary the amount of stock you buy when you buy (ie: avoid locking yourself into minimum buying volumes), you can protect yourself against both eventualities to a certain extent, especially if you use supply chain finance, to negotiate early settlement discounts from your suppliers for paying them promptly, as delaying payment to suppliers is the first sign to them that you are in trouble and you business doesn’t have the cash flow to keep funding its inventory during tough times. Have a look at OptiPay’s Supply Chain Funding solutions and how this clever solution will keep you paying your suppliers early, and at zero or very little cost to your business. Such a funding solution doesn’t only improve your finances but goes a long way in supporting your suppliers by paying them upfront giving them the cash that they also need, whilst allowing you to pay up to 90 days after receiving your inventory. Now that’s clever finance.

4. Improve Cashflow

Most SMEs are theoretically capable of withstanding a temporary downturn in the markets: they can cut staff and order fewer supplies to downsize operations whilst staying profitable. The problem is, they can’t do it quickly enough and when they go the business is usually much smaller with much lower revenue. Cashflow is the critical factor, and the cashflow situation changes faster than many businesses can adapt to. If you can’t pay your bills things will spiral rapidly, and that’s why cashflow is the biggest killer of small businesses by far. You can vastly improve your cashflow management and by using Invoice Finance, to access the cash you need tied up in your receivables ledger instead of waiting 30-90 days for your customers to pay. A solution like this has become the norm for growing businesses in the UK and the cost to implement and run an Invoice Finance (or Debtor Finance) program is far cheaper than getting an unsecured non-bank business loans.

For those businesses that import product, another great finance solution for a business is called Trade Finance or sometimes called Import Finance. Instead of having to pay your overseas suppliers upfront at the time of receiving the bill of lading (BOL), Trade Finance bridges the gap by providing you with the funds you need to pay your suppliers, when the goods are ready to leave, will the ability to then pay it pay up to 120 days later. This gives a business the ability to import the product, finish the goods (if needed) when they arrive in Australia; sell to your customer and use the money that they pay you to then repay OptiPay for the funds provided to pay your suppliers 90-120 days earlier. Another great cashflow solution, at a very affordable cost, for any business!

5. Ensure Access to Extra Funds

If there is a really sharp downturn, as we saw during the financial crisis, even SMEs with excellent cashflow and inventory management may get into difficulties. At this point, having access to some emergency funds will be needed to keep your head above water longer than your competitors and ensure you survive to pick up the spoils. Flexible, Selective Invoice Finance can help you with this, because you can increase the number of invoices you put forward for funding whenever you need to. Additionally, by using invoice finance you can leave your overdraft untouched (and not have to risk your personal home or business property, which is usually given as collateral to have the overdraft) to effectively create an emergency pool of funds that is free until you need it!

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