How recession-ready is your business?

Finding the most economical path that is right for your business

Reading recent headlines, economies around the globe are faced with challenging times. Volatile exchange rates, rising inflation and soaring interest rates are causing major headaches. The weekly trip to the grocery store is more expensive than ever with prices of fruit and vegetables, milk and other household staples steadily increasing; not to mention the cost of petrol. The signals are clear that inflation is taking its toll and there is more to come.

Rising interest rates will ultimately lead to a reduction in customer spending, making borrowing money harder and more expensive for businesses. On top of that, business owners are faced with ongoing disruption to their supply chains, creating difficult trading conditions and placing more pressure on working capital.

Cash is king

Working capital is the lifeblood of any organisation; it ‘keeps the lights on’. Effective cash flow management is absolutely essential to maintain efficient business operations, evolve products and services, expand into new markets, and recruit and retain top talent.

With increasing pressure on the Australian economy, your business should consider building up its cash reserves to prepare for challenging financial periods without having to rely on your bank to lend it money. In simple terms, take the average monthly costs of running your business and decide how many months’ worth of expenses you should have in reserve. Rule of thumb is to keep three to six months’ worth of ‘cash cushion’ in a separate bank account and only access this reserve if your business is in dire need.

Before you start setting aside the cash reserve, you might want to look at improving your cash management position by reducing debt. Putting longer-term investments such as mortgages, vehicle and equipment leasing and/or loans aside, your business should prioritise reducing expensive, short-term debts such as credit cards and overdrafts.

Profitability over sales

As economic challenges mount, business owners tend to focus on revenue growth, putting pressure on their teams and themselves to find more leads and generate more sales. However, increased sales and revenue growth may be a false indicator of business success. In many cases, the pressured sales team will drag new deals across the line by offering discounts or promising more service at the same price point.

As a result, the profitability will come under pressure. The business ends up with more money coming through the door, but also with an increased workload and stockholding which quickly depletes cash reserves and reduces profit margins.

In a nutshell, keeping an eye on your operational costs is just as important as looking at growing sales and increasing your revenue.

Invest in the future

When the going gets tough, business leaders may be forced to do more with less people and less capital to stay afloat. Many businesses respond by battening down the hatches, reducing their workforce and making deep budget cuts. However, a report by Harvard Business Review found businesses that reduce costs quickly by laying off staff will find it harder to recover as they emerge from the downturn.

A downturn can also be seen as a prime opportunity to improve business performance and increase market share. In fact, companies focused on improving their operational efficiency fared far better coming out of a recession. That is not to say businesses should not also consider tightening their budgets.

The trick is to find a healthy balance between cutting budgets and investing in future-proofing your business. Improving operational efficiency is a critical component to optimise business performance, reduce cost and most importantly remain competitive long term.

Business owners need to look at ways to improve and automate manual, time-consuming tasks. Streamlining your processes will not only boost the efficiency of your business, but also improve accuracy and minimise errors. More importantly, it will free up employees, allowing you to redirect resources to other areas including R&D, innovation, customer satisfaction, lead generation and sales.

The looming economic slump is certainly causing many business owners some sleepless nights. Difficult choices will have to be made and these decisions will have real-world implications for your people, clients and suppliers. It is important to find the most economical path that is right for your business. A balanced path will not only ensure your survival but position your business for a strong emergence from this foreshadowed fiscal nightmare.

Morgan Shaw Advisory (MSA) works with owners of small and medium size companies to help them grow personally, significantly improve the performance of their business and get it GAME READY.

Get in touch and let us help you identify areas within your business which will have the biggest impact and significantly improve the performance of your business.