As the winds of an economic downturn are now firmly blowing and with many predicting a period of recession, it has been interesting to see the opinion and advice articles that have popped up about how one can ‘recession proof’ their business. While there are actual short-term measures you can take to help your business survive an economic or industry wide downturn, We find the best strategies for overcoming difficult conditions are often ones you should be almost always employing – regardless of the macro-economic conditions you find yourself operating in. With this in mind, we want to share with you the recession proof tactics that are important for businesses to employ at all times – from the perspective of a seasoned CFO to the small medium business sector.
Have a Cash Flow Plan and Implement Rolling Forecasts
A business can be profitable and can still and often do fail because of poor cash flow management and conversely a business can go through a period making losses, but good cash flow management can help them get through this. And a rolling cashflow forecast is cashflow management 101. This includes projecting out your cash inflows and obligations and developing a plan to manage any shortfalls, financing requirements and surplus funds. Typically, you will forecast 3-12 months ahead. To paraphrase a common business idiom, if you fail to have a cash flow plan for your business you are planning for your cash flow to fail you!
Manage your costs
It seems obvious to say that a business needs to be managing their costs well to be able to succeed. However actually doing this well can be something that alludes a lot of businesses, particularly if they are too focused on top line revenue growth.
Monthly reporting and review of the main cost centres in your business and how these are trending is an essential task in running a successful business. Grouping the cost reporting in your business in to 5-6 main categories (e.g. Employment, Admin & Finance, Facility, Marketing $ Sales and Distribution) will allow the main costs in your business to be more easily assessed and benchmarked against targets.
Regular cost reviews and market comparisons are another important component of managing the costs in your business and can put you in a stronger negotiating position or open you up to more cost-effective avenues of supply.
The last aspect to managing costs is Cost cutting. Cost cutting should be surgical-like as you need to be careful not to cut costs that impact deeply on your key capabilities. It is also prudent to aim for cuts that can be easily reversed as conditions change. For example, laying off staff should be given careful consideration in the current marketplace of close to full employment. Some cost-saving options which fit in to the advice above includes renegotiating terms with suppliers, re-evaluating distribution methods and cutting personnel costs such as discretionary employee benefits.
Invest in your business
Managing costs is more than just about reducing costs as you also need to consider where you may need to increase your spending to grow your business or increase cost efficiencies, such as investing in technology and marketing. Investing in marketing your business through the right channels is not something you should neglect, even in leaner times. This looks differently for different businesses, but utilising socials and community engagement events are examples of relatively inexpensive ways of staying connected with your target market. It is also important though to complete a realistic cost benefit analysis of any investment opportunities you are considering. In most cases you want to be confident that the return you are going to generate is greater than what it is going to cost you over the entire life cycle.
Look for your ‘low hanging fruit’ as well as planting new trees
It is often easier and usually more cost-effective to scale up by mining opportunities within your existing client base and network than to acquire new clients or chase new markets. Are there products/services in your range that your existing customers are not ordering from you which they could be? If you can expand your customer basket invariably you can deliver this at lower marginal cost to service. It is also wise to review your existing assets and resources for opportunities for multiple income sources. For example, you may have office/warehouse space or equipment that you are underutilising which you can rent out. The other end of this is to look at the possibility of sharing resources along your supply chain or with others in your industry which can allow you to retain expertise but at a lower cost to the business.
Explore grants or tax incentives/credits your business is entitled to but are not capitalising on.
A famous Australian businessman once said, “that anyone who doesn’t minimise their tax, they want their heads read because, as a Government, they’re not spending it that well that we should be donating extra!”. Many business owners not capitalising on rebates or grants they are entitled to. To determine what your business is entitled to you can do your own research online or consult an accountant/business advisor. However, a few that we come across often include:
· R&D Tax Incentive – offers a tax offset for companies conducting eligible R&D activities which includes your corporate tax rate plus an incremental premium
· Fuel Tax Credits – a credit for the fuel tax included in the price of fuel usually consumed in heavy vehicles or off-road vehicles and machinery
· Instant Asset Tax Write-Off – Up until 30/06/2023 there is an opportunity for eligible businesses to fully deduct the cost of asset purchases where the asset has been received by the business before the end of the financial year. This is currently set to revert to $20,000 from 01/07/2023 and will only be available for businesses turning over less than $10M, so get in quick!
Look for flexibility in your operations and supply chain
Protecting your business against unplanned disruptions is one of the biggest lessons the business community took out of the Covid pandemic. Some ways small medium businesses can continue to do this is to maintain a flexible and diverse supply chain and workforce that can respond well to disruption. Some ways to build this capability include having multiple sources of supply on key ranges with a mixture of local and overseas options and having a workforce setup to work remotely and ideally with the ability to scale up and down easily if needed.
While there is nothing wrong with preparing your business for difficult conditions and there are short-term measures you can take to help your business overcome rough waters, the most effective are strategies and disciplines you can maintain in your business well after conditions have improved.
Joseph Essey – Associate Partner – Small & Medium Business Advisory, Accounting and Financial Control