Is your business recession proof?
By Jim Vass
There’s been a statistic roaming around the news and media sites in the past couple of weeks, that 26% of Australian business have been affected by fires. More than a quarter.
Let that sink in for a minute. Then consider the fact that the economic experts are saying this could be just the tip of the iceberg and there will be more to come as the country copes with the fallout of one of the biggest natural disasters in national history.
The dreaded ‘R’ word has also been mentioned.
We are not out to be doomsayers. In fact, we’re optimists here at ATB Partners, with good reason. We’ve seen businesses thrive in the worst of times. And there are a lot of positive economic indicators right now that should hold us steady in the months to come. But these things can be hard to predict, and it’s always worth being prepared, and to plan ahead.
So, with that in mind, it is, we think, worthwhile considering right now what you might do if a recession hit.
1. Diversify your revenue.
We recently wrote on this topic. Your business should never be overly dependent on one particular market or revenue stream. So take time to consider ways you can diversify.
2. Reduce expenses.
It’s simple budgeting 101 to know that you’ll never succeed if you spend more than you earn. You should be able to determine what’s discretionary and essential in your business, and make decisions accordingly.
Go over your budget, line-by-line, and make plans with regard to what you can reduce, if you need to. Bear in mind that a recession doesn’t mean throwing out your strategic plan and hunkering down in a bunker until the storm is over. This can actually be more detrimental. So just modify your plans, forge ahead, but consider doing so on a smaller, leaner scale. Or put some plans on ‘watch-and see’ list and then revisit them down the track.
3. Put some money away
Every business should have an emergency fund. If don’t already, start building cash reserves in case the lenders start to put the brakes on, which can often be the case in recession.
The amount you need depends on the size of your business, its volatility, its revenue, and its margins. You should aim to have enough to cover six months’ worth of expenses. Of course, also ensure you can cover your tax payments. The last thing you want, is to rack up debt with the ATO.
4. Keep inventory low
If you’re in the business of selling products, take a look at your inventory. During lean times it’s best to ‘think lean’ about inventory. The stock on your shelves or in boxes on the warehouse floor is cash that’s already tied up. Ask yourself: How much do you really need?
5. Manage Debt
This is a big one. Particularly in light of the fact that interest rates are low in Australia right now, and many businesses have been taking advantage of the ability to borrow a bit more. Be aware that if economic conditions change, then interest rates may go up, which if it’s something you haven’t planned for, can put pressure on the cash flow.
But we’re not just talking about working capital – if you have debts to vendors, or customers who owe you, now is the time to settle these. Debt compounds quickly when budgets tighten, so pay it off while you have the cash. Start by knocking down your higher-interest loans first, then move to the others.
If we can help, contact us. At ATB Partners we’ve developed the 5-Step Process for small business. It’s a planning tool. And with the right planning, your business can be prepared for any changing circumstances.
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