Losing sleep over fears about the economy? Protect your business and improve its overall health with these six tips.
From backyard barbecues to board rooms at the top end of town, one question keeps coming up in the discussions of anyone with financial obligations: Will Australia enter a recession in 2023 – and, if so, when?
The usual recession tipping points – inflation, property values, employment levels, new car sales and copper prices – have been proving inconclusive, with even the most senior experts divided on what each successive indicator might mean.
Forbes has reported that Goldman Sachs CEO David Solomon told the recent Future Investment Initiative summit in Saudi Arabia that he believes a prolonged recession is approaching and put the probability of one occurring in 2023 at 35 per cent. Over at Bloomberg, analysts put the possibility at a definitive 100 per cent.
“Waiting until a recession hits to apply for the money you need may leave you facing tougher lending criteria.”
The traditional definition of a recession is two consecutive quarters of negative real GDP growth. But other experts, such as Australian independent economist Saul Eslake, define it as a period that starts when unemployment rises by 1.5 percentage points or more, in 12 months or less, and lasts until it starts coming down.
Currently, the conventional indicators for an economic slump are proving hard to pin down. In December 2022, the Roy Morgan Monthly Business Confidence indicator was 96.0 (up 5.8pts since November), largely recovering from the 6.4pts of decline the preceding . month
Both short-term and mid-term confidence have grown, with 39.2 per cent of businesses surveyed saying they expected “good times” for the performance of the Australian economy over the next year, up 5.1pts on the previous month. The expectation of good times for the economy over the next five years is slightly higher, at 39.4 per cent – a rise of 5.9 pts on the previous month.
How does this affect small businesses?
Small businesses tend to bear the brunt of any economic slowdown and are more vulnerable in any crisis. For example, more than 400,000 small businesses closed during the pandemic.
When a recession hits, the decline in demand for your products or services is evident. This affects your cashflow, potentially leading to trimming of costs, staff reductions, cutting of budgets and deprioritisation of certain upgrades. Financing your growth projects may become more difficult.
Unlike large businesses that can raise funds through investment and publicly traded stock, small businesses usually rely only on themselves. Traditional lenders are aware of this, which means they can be less enthusiastic about lending to SMEs.
What can I do about it?
Regardless of how you define a recession – and whether all these factors are just random blips on the chart or speak to a more sustained trend – it makes sense to ensure your business is as recession-proof as possible.
Take a moment to consider the following strategies to build your business’s resilience before any downturn hits – and hopefully put an end to some of that worrying:
1. Retain your customers
One way to recession-proof your business is to invest in your existing clients. It’s considerably easier and cheaper to get repeat business from your existing customers, than to attract new ones. Your current client base knows your business, likes what you’re selling and trusts you. Nurture them with good service, exclusive deals and clear communication. This may well lead to referral business at no additional advertising or other marketing costs.
Can you improve your product or service? Is it finally time to go digital? Or can you boost your offer with incentives or discounts for multiple products?
2. Reflect on your business
Understand your financial position, and monitor your cashflow, outstanding invoices and sales day to day. Make sure your invoicing and accounts receivable operations are working efficiently. While this may seem obvious, business owners can get caught up in other areas of their operations and forget to prioritise the financial fundamentals. Good advisers, such as your accountant, and a strong banking relationship, can help guard against this.
3. Know your cashflow options
Make sure you have access to flexible working capital and emergency funds before you need them. Waiting until a recession hits to apply for the money you need may leave you facing tougher lending criteria, making credit and capital harder to get.
4. Fuel your value chain
Your suppliers and other stakeholders will be facing similar challenges to you. Talk to them about what impact they anticipate for their business, and vice versa, to help you plan for contingencies where supplies or sales are concerned. With sufficient market intel, you can order extra inventory if supply interruptions are likely or put in place incentives to add value for customers and keep them on side.
5. Plan your loan
Use borrowing to your advantage. A healthy unsecured loan amount that’s used to achieve specific growth plans and strategies for your business can give your company the fuel it needs to grow.
Weigh up the benefits of taking out a business loan before a recession lands. The repayment terms obviously have to be manageable, so shop around. At the same time, if you choose not to acquire a business loan, you should calculate whether your credit score would be impacted if you needed a financing option later on.
Both research and anecdotal evidence show that small businesses can have a harder time qualifying for a loan from a traditional institution. Alternative lenders can be a better option for SMEs seeking essential capital during a crucial time, and these lenders can often provide loans quicker and with less red tape. Work with your advisers to figure out what size loan you need, and make sure you have a well thought-out business plan.
6. Employ smart
Is there potential in your business for flexibility in staffing, such as a mix of permanent and labour-hire employees? This could help you ride out any dips in demand and manage wage bills, yet still allow you to be fully resourced when there’s an uptick in activity. Just remember to keep a weather eye on labour availability in your specific industry.
Even if the recession winds don’t end up reaching Australia, by following the planning and preparation involved in these suggestions, you can give your business a smoother ride in the uncertain months ahead.
This article first appeared in issue 40 of the Inside Small Business quarterly magazine
