How SMEs can survive an economic downturn

Recession

Is Australia heading towards a recession? A combination of factors including rising Australian household debt, the state of the energy market and the fact that Australia hasn’t experienced a recession for 25 years, have led many commentators to speculate that a recession or slow down may be imminent.

The good news is that SMEs can not only survive economic downturns, but also come out the other side stronger. I know this, because I experienced it myself. I built a multi-million dollar business in the 1980s and when the recession ‘we had to have’ hit in 1990, suddenly our revenue more than halved. It was devastating. However, by taking practical steps to restructure the business, not only did it allow us to weather the storm, but our net profits actually soared.

So, how can you shield your business from an economic downturn? Here are my top ten tips for SMEs:

1. Diversify income streams

It’s important to ensure your business is not totally dependent on one income stream which may be hit hard. Look for products and services that can easily be sold to existing clients to reduce the need for finding new clients and thereby reducing the cost of client acquisition.

2. Create joint venture relationships

By partnering with organisations that have the same or similar target markets you can leverage their contacts and create a source of referrals. Referrals have always been a more credible lead generator than cold leads. This reduces the need for marketing spend and helps both businesses.

3. Seek out higher margins

Put more focus on carrying and marketing products or services with a higher value and therefore higher dollar margins to help pay for overheads. Look for options that are perceived as great value for money (even though they are higher in dollar value). This helps the business pay for its monthly overheads while still offering a ‘great value’ product or service for the customer or client.

Be selective and possibly change direction towards a more receptive potential market which may not be as price-driven and has a better appreciation for the higher level of service or higher value products to avoid markets that force price wars.

4. Closely monitor cash flow

Even the biggest businesses have been undone by cash flow. Don’t become a slave to cash flow, make your cash flow work for you.

To improve your cash flow position, reduce or eliminate credit terms for customers. Consider offering better pricing for upfront payments. This will reduce the risk of late payment or non-payment, thereby improving that business’ net variable cashflow.

Another option is to apply for longer trading terms with suppliers. Avoid having to pay upfront for purchases or services to shorten the period between paying for purchases and receiving payments from customers.

5. Invest in marketing

Many businesses make the mistake of making overly deep cuts to spending in a downturn. While it’s important to keep your costs as low as possible, it doesn’t mean you should stop investing in your business.

Marketing is one of the most important investments to make during a slowdown, as it will create a pipeline of customers or clients. The key is to make sure that you have freed up cash flow to spend on marketing and that you invest in marketing activities that will deliver a high ROI.

6. Reduce staff costs

Staff costs generally are the biggest business overhead. Wherever possible reduce staff costs by reducing staff hours, multi-tasking, outsourcing and automating tasks throughout the business.

7. Invest in training or coaching

By investing in training or coaching, you are investing in the growth of your business. Training may include sales, persuasion or customer service training which will allow you to convert customers or clients better, rely less on new client acquisition and stand out from ‘ordinary’ competitors. Business coaching will give you a laser focus on the strategies which will protect and grow your business.

8. Reduce inventory levels

Reduce your product range to the most essential products with a good margin and the highest stock turns. This will enable you to respond quickly to sales downturns by offering attractive specials and bundles. Reduce and try to eliminate slow stock by trying to hold stock from suppliers on consignment or not holding stock and only bringing the slower stock in to order.

9. Offer digital products or services

Where possible consider offering online or digital products or services that are easy to scale and grow once the initial set up costs have been outlaid.

10. Reduce fixed overheads

Try to reduce fixed overheads as much as possible by using scalable services such as shared office facilities, 3rd party logistics warehousing, and casual or freelance staff so your business can react quickly to a downturn and not be committed to long term leases and staff contracts etc.

Not only will these tips prepare your business for an economic downturn, but they also make good business sense in a strong economy. By making these practical changes you can ensure your business is as efficient and profitable as possible, whatever the economic conditions.


About the author

As the Founder and CEO of InnovestSME, Rick Chisholm helps small to medium sized enterprises (SMEs) achieve and exceed their business goals. Rick draws on his 30-year career as a serial entrepreneur and business leader to help SMEs destined for success, but held back by circumstances, make their vision a reality. He has started and grown over 28 SMEs, including the Lightsounds Group of Companies, Macquarie Business Consulting, Master Coaching International, Australian Education Alliance and The Australian DJ School, turning over in excess of $300 million.