1st May, 2019
With pundits predicting tough times for the global economy, the time is now for small businesses to find creative ways to survive a downturn writes Mark Phillips.
Australia has dodged its fair share of economic banana skins over the years, but many believe it – along with the rest of the world – may be about to come a cropper.
“Our external consultants say we’re starting to go down the slippery side,” says Murray Wyatt, Director and Chairman of Melbourne-based financial services firm Morrows.
“You have an economic cycle and we’re past the tipping point.
“The ANZ Australian Job Ads series has dropped off, the yield curve is inverted and 100 percent out of 100 occasions when there has been an inversion, things have gotten pretty tough.”
Australian job advertisements placed online fell six percent in March 2019 on a seasonally adjusted basis when compared to March 2018, the steepest decline in over five years.
The yield curve inversion – the yield curve is inverted when the yield or interest rate on short-term bonds is higher than that on long-term – is a telling sign of impending recession in the US.
It has been the most accurate predictor of recession since the 1960s and has prompted economists to warn that it is not a question of if Australia will be affected, but when and to what extent.
In its latest outlook, the International Monetary Fund steeply downgraded growth forecasts across most of the developed world, including Australia. A report by ratings agency Standard & Poor’s into risks facing Australian businesses cites a rise in ‘thrifty’ and ‘listless’ consumers looking for ways to reduce spending. Gloomy forecasts from Deloitte Access Economics signal pain for the local economy.
Optimists point to low unemployment, but Nicole Smith, Chief Economist at Georgetown University Center on Education and the Workforce, warns: “Low unemployment is often associated with a boom phase just before a recession”.
Further, trade barriers between the US and China are stoking fears that a full-blown trade war could derail economies around the world, undoubtedly a reason why in the leadup to this year’s World Economic Forum in Davos a survey of over 800 global business leaders identified recession as their number one external concern.
During an economic recession, smaller businesses are often hardest hit.
Even though Australia avoided the worst of the GFC, many types of small business (such as those in luxury services) suffered badly from reduced consumer spending.
Some sectors coped better than their overseas counterparts with reduced cash flow, loss of demand and forced staff reductions, but many SMEs still went out of business because they had insufficient cash reserves, couldn’t get a loan, or had no contingency plan for survival.
To weather a financial crisis, it’s a given that all SMEs need to build a cash reserve; implement a good invoicing and collections system; carefully weigh new costs; improve inventory management; and keep a close eye on financial statements.
According to Thomas Koulopoulos, author of The Innovation Zone: How Companies Re-Innovate for Amazing Success, they should also innovate.
“A recession is an especially good time for entrepreneurs to build loyal followers,” Koulopoulos says, noting that big companies will be distracted during a downturn, “but when the economy recovers, everyone will go after that audience – and if you already own it, that gives you tremendous leverage”.
If a cash reserve is a vital failsafe (aim for at least six months of buffer), establishing a diversified client base is equally important. This means flying in the face of those who say that when a business is forced into budgetary restraints, the first activity to go should be the ‘luxury’ of marketing.
In times of widespread disruption and attrition, owners who continue to rely on a handful of clients for revenue risk disaster.
Instead, get on the front foot by creating partnerships and, where possible, redefine your target audience towards recession-resilient industries such as healthcare, education and IT.
Some other marketing tips to bolster your business:
Importantly, allow workers to show their creativity and innovation. Don’t just demand greater productivity as staff will likely become overworked or demoralised. By retaining staff, businesses can more easily hold on to knowledge and skills.
It may be impossible to know precisely when the next recession will hit, but it’s essential that SMEs prepare for it because, as former Reserve Bank of Australia governor Glenn Stevens has said: “It would be foolish to think we have found the secret of eliminating the cycle, because we haven’t”.
Speaking to The Wall Street Journal, Stevens put the probability of another recession at “more or less 100 percent”.