When the COVID-19 storm hit in early 2020, millions of Australian small businesses and their hard-working owners took a financial hit. And the fallout continues. The public health crisis is still impacting our lives, skills shortages are creating challenges for employees and the economic situation is volatile, with inflation running wild and interest rates playing catch up.
With signs pointing towards a possible recession, we’re sharing some top tips to prepare your business for an economic downturn. If the recession storm hits, be ready!
Top Tips to Prepare Your Business For a Recession
Recessions create a dire economic spiral. Basically, when the economy is in a recession, people spend less money because they fear losing their jobs or are struggling with cash flow. This means businesses aren't selling as much so they make less money, which forces them to let staff go. It also becomes harder to get loans or capital investment, particularly when you overlay inflation and rising interest rates, meaning more businesses close their doors for good.
Here are some tips to help you weather the storm and come out the other side; not just surviving, but thriving.
Develop a Solid Financial Plan
It’s essential to have a financial plan in place to help your business navigate a recession. This plan should include a detailed budget, forecasting of revenues and expenses, and a plan for managing cash flow .
As a small business owner, you should prepare ‘what if’ projections for at least two or three scenarios. When making forecasts, ensure they can project outcomes for both worst case and best case scenarios through robust financial modelling.
Build Up Cash Reserves
Once you’ve got your financial plans locked down, this will help you build up enough cash reserves so your business can weather the downturn. Some ways to increase your cash on hand include reducing expenses (where’s the fat?), increasing profits (inspect product or service gross profit margins), or opening up a line of credit option in periods where the business is going well.
If your business has a dividend policy, you should review it and engage with shareholders ASAP as part of the scenario planning mentioned earlier. Set expectations that the business is preparing for a recessionary economic environment and thus pre-30 June 2023 dividend plans are under review.
Strengthen Relationships With Customers and Suppliers
During a recession, customer loyalty is crucial to business survival. Build trust with your customers by creating a better customer experience , offering high-quality products and services, and listening and responding quickly to their needs.
As for supplier relationships, the ability to continue sourcing your necessary inputs at the appropriate cost and regularity is a key to success; so look closely at supplier payment terms. If creditor terms can be extended, it’s easier to ask now instead of waiting for a recession to happen and falling behind.
Review Your Debt Levels and Improve Debt Collection
A recession can pile on the pressure for businesses with high debt levels. It’s essential to review debt levels and take steps to reduce them. This could involve negotiating with creditors, refinancing or selling assets.
Businesses should also review their approach to debt collection , including policies, strategies and human resources, and ensure collection days are as low as possible. Have good visibility on your debtor days, and ensure this is as tight as possible under good circumstances, rather than waiting for the bad times to implement change.
Diversify Your Revenue Streams
Exploring new revenue streams can help to offset the impact of a recession on your business. Consider offering new products or services, entering new markets, or finding ways to generate additional income, such as leveraging existing resources or partnering with other businesses where you may already have an informal relationship.
Also, analysing the whole customer journey might unearth ways to increase revenue at different points along their journey. Or, think outside the box. A business could consider offering the public online courses or workshops based on their services or industry.
Embrace Digital Business Solutions
Allocate some time to exploring how digital transformation can improve efficiency and cut costs in your business. Digital business solutions can be anything from tools to automate repetitive tasks, online advertising to reach a wider audience for less, cloud-based accounting software to keep better records and tools to capture and analyse data to enable better decisions and identify new opportunities.
Stay Informed About the Economy and Connected With Your Industry
Things can change fast in business – especially if a recession hits – so it’s essential to stay informed about the latest economic developments and know what support is available to small business owners. Since the beginning of the COVID-19 pandemic, our advisors have assisted many business owners to take advantage of government grants and incentives on offer.
It also helps to stay up to date on the latest trends in your industry. Follow the news, attend industry events, and talk to other business owners to get a sense of what’s going on and make sure you’re ready to capitalise on the opportunities and prepare for the challenges.
Be Recession Ready and Protect Your Business
Recessions are a normal part of the business market cycle and, while they’re inevitable, they always seem to show up uninvited. But you can prepare for their arrival. By following these tips, you'll be better equipped to handle whatever curveballs the economy throws your way.
If you're feeling a little lost and need some guidance, we've got your back. Our team of skilled accountants and business advisors can help you navigate challenging times and make sure you don’t just survive, but thrive! Get in touch with a BlueRock business advisor today and let's weather the economic storm together.
