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As the economy contracts and households tighten their belts, what is the outlook for small business?
We posed that question to two local professionals and here’s what they said:
KGA director Jen Smith
What is the mood among local businesses looking ahead to a period of recession?
There is a frustration that while larger projects are still out there and being quoted, it’s taking longer to get these approved and off the ground.
What concerns are businesses raising?
There’s less work available and tradies are quoting for work and missing out on jobs they would normally expect to get. The market is especially flooded with good builders, so clients can take their pick and obtain multiple quotes more easily than they could a year ago.
In terms of weathering a recession, what’s your advice?
Everyone needs to understand their numbers, and especially their cashflow. Larger companies need to plan further in advance, as they tend to be less adaptable and take longer to cut costs if necessary. But in general, the same principles apply to businesses of all sizes.
Business owners should be monitoring their profit and loss monthly, planning ahead for ‘what if’ scenarios, and especially cashflow forecasting. Even if it is just a pen and paper list of money coming in and going out, knowing when things are going to get tight, and having a plan for what to do if that happens is key. It will also help you sleep at night.
Is it possible to recession-proof a business and if so, how?
The best advice is to be proactive. While strong reserves will always help, the ability to quickly cut costs will be invaluable, as will having a plan of what to do if work dries up. Staying on top of cashflow and, in particular, slow paying debtors will be crucial to weathering the storm.
Overall, business owners shouldn’t bury their heads in the sand. Come up with a budget so you know exactly what your sales need to be to cover expenses and meet debt obligations. Then monitor actual results consistently and have a plan ready for if sales drop. Ask yourself, “Can we pivot and sell into another area, or another service? What costs can we cut?” Note that while it is tempting to cut marketing, this can be counter-intuitive, as this could lead to a further decrease in sales. Monitor both profits and cashflow to make sure both are on track and make sure you have a plan if these drop significantly. Be very proactive with debtors, and consider asking for deposits upfront, so you’re not carrying the cost of the whole job until you get paid.
RMA Financial senior adviser Dave Managh
Businesses in the wider Rodney area are feeling stressed as inflation and price increases across the board put pressure on both supplier prices and household cashflows. This is being seen most heavily in the construction industry, but is present everywhere. Mums and Dads are making financial decisions to tighten their belts, which is reflected in reduced expenditure at hairdressers and motor mechanics, to cancelled streaming for media subscriptions. Rodney is generally better placed to weather this recession than other regions and we should try to keep our eyes focused on the light at the end of the tunnel.
What are some of the key concerns businesses are raising?
- The impacts of inflation presently are two-fold, increased supplier costs and reduced domestic spending, as affordability is hitting household expenditure. So we are seeing increasing costs in business and, at the same time, revenue pressure is putting a squeeze on profitability.
- The impact of raised interest rates if they have business debt.
- The importance of staff and their productivity.
- Struggles with increasing levels of regulation. On one hand regulation can bring improved outcomes, but it can also lead to bureaucracy and lost productivity
Both small and medium-sized businesses have the same priorities – secure sales, managing costs to deliver profitability – while also delivering good client outcomes that generate repeat or referral business. Small businesses and sole traders have an ability to be ultra-nimble and seize opportunities, but tend to be less financially resilient. In comparison, a medium-sized business (say 20 people) will have less flexibility and needs to make decisions with a longer term outlook and consider their staff needs, but typically has the advantage of an established customer base or brand to lean on in times of a recession.
How can owners recession-proof their business?
Have a network of people to call on. We need access to business knowledge, sales, operational and financial expertise and, more than ever, leadership and people skills to lead the team through the recession and back into calmer waters when profitability is easier.
A key factor to running a successful business is the concept of many incremental improvements making a significant difference. This is especially true in times of a recession, when availability of finances may restrict a bold large step. Look for small improvements in customer service and outcomes, staff and operational productivity, cost management and, of course, sales activity. Often we just need a little time and focus to make a proactive process change to what we do on a daily basis. Be open with your team about what is and isn’t working, and get them to help contribute to develop the list of incremental improvements. The bigger the team, the more important this is as the team can achieve more than the business leader/owner can alone, and it is a great way to focus the team.
In general, be focused on good customer outcomes, whether you are providing a service or a product.
Make business decisions based on logic, and sometimes instinct, but certainly not out of fear. This recession will end and there is light at the end of the tunnel. If you are doing it tough today, know there will be a better day than this one. Have hope and give your team at work encouragement – we are people and we all need more of that.
This content is for general information and does not constitute financial advice.
