Driving a business from good to great by Roger Mendelson
It’s been almost 25 years since Australia last experienced an economic recession. Since that time, a whole generation of business leaders have risen through the ranks, only to experience economic growth writes Roger Mendelson.
Recessions, by their very nature, are unpredictable. There has been much speculation from commentators in recent months predicting a recession, but in reality, only few can accurately predict when one will hit.
If one is forecast, society as a whole prepares for the impact, and as a result the effect is typically less severe or can be avoided all together. For example, Australia and the 2008 Global Financial Crisis in which the government at the time pre-empted the impending disaster and managed to steer us through it relatively unscathed.
I’m certainly not predicting a recession but, given current economic conditions, it is wise for business owners to be prepared and know what to expect should one hit. What does a recession look like? Invariably a whole lot of bad things happen almost simultaneously, regardless of what triggers them.
Once a recession mentality sets in businesses tend to respond swiftly, moving into survival mode and shifting focus away from long-term growth. As a significant expense in every business, wages are usually the first things that will be cut to ease the pressure on a company’s cash flow.
There is a real domino effect that hits almost all businesses, particularly those providing ‘non essential’ services, as consumers tighten their purse strings and stop spending on all but necessities.
Consumer-facing businesses will be forced to reduce orders from suppliers and defer capital spending, further hurting B2B companies who are forced to put pressure on their clients for payment.
Banks will also start calling in business loans, and credit card issuers will reduce their available credit, insisting on higher repayments.
If this is sounding gloomy, it’s because it is. This feeling of negativity really seeps into the economy and only serves to further downturn. How can you be prepared? It is a frightening experience and occurs rapidly. Recessions are like a tsunami; you can’t predict one and by the time you see the warning signs it’s too late. Unfortunately, this means it’s difficult for companies to be properly prepare for the sudden change in business conditions.
There are however, some steps all businesses should take that can provide a solid foundation to see you through any tough times. 1. Make a plan Set up a ‘survival team’ of senior staff to create a game plan for a severe recession; it’s better to hope for the best but prepare for the worst in this situation. This team should include an external advisor or accountant to provide independent advice and help you make any tough calls. 2. Brace yourself now There’s no doubt that economic conditions will deteriorate this year. Even if a recession isn’t on the cards, it would be wise to start moving into survival mode and put any plans for growth on hold. Consider cutting unprofitable areas of the business as these will only become a bigger burden when times get tough. 3. Assess your current situation Now is the time to examine your current debt levels and focus on reducing this as quickly as possible as this can be a real area of exposure in a storm. You should already be planning for the bank to reduce their assistance and don’t rely on them providing any help through the tough times. 4. Improve your processes You need to ensure your billing and collection functions are running efficiently to ensure you maintain a strong cash flow. This needs to be done today, don’t wait until the cash crunch hits and you need the money quickly.
A recession can collapse many businesses. While you typically won’t see the signs until you are in it, ensuring you have solid processes in place will go a long way to helping you survive if one hits. And if not, at the very least, you’re prepared for the very worst.