4 Factors to Successfully Navigate Recession for SMEs
Recession is defined in most of the literature as two consecutive quarters of negative growth. A lot of SMEs who are doing business may feel it at very different times during the cycle. For example, a fast food restaurant would not see the drop in sales as much as a retailer who deals in curtains and flooring. In most of the cases though the business owners will see their sales dropping down, orders getting delayed and receivables getting late. A recession would hurt most people and some of the leveraged businesses might find it difficult to manage their cash flows and face hardship from their creditors, banks and potentially go bankrupt.
We have seen enough cycles of boom and bust globally and closer to us in New Zealand. There are few tricks which can help SMEs navigate the cycle better and may be able to take advantage of cycle to scale up their businesses
- Cash is King
Conserve Cash, Delay unnecessary spending. By unnecessary spending in the business, we mean anything which doesn’t add in revenue, or which can be delayed without adversely affecting the revenue. For example, if your business has a vehicle and you were planning to upgrade it, postpone that plan and conserve cash. If you want to put a paint on the outer walls because it was planned, delay it till you are comfortable with cash flow. If you need to advertise for your products in digital and print media and you are thinking of reducing it, Hold, Evaluate, would it affect your revenue if the answer is yes to revenue, then we would suggest continuing with the advertisements.
- Focus on Sales
Most of the customer would be in a similar situation and they know they can wait for better deals; Sales is one of the focus of SMEs and they shall endeavour to achieve sales even at reduced margins. This is especially true if you are selling a product, service which is illiquid, and client can wait for some time. We have seen this specially in luxury goods, Cars, and even residential homes. A lot of business/vendors are hooked to the prices which were prevailing 2-3 months back but since than market has come off. Some of the developers which we have worked have focused on clearing the inventory to make room for new projects or hold on to cash for better deals. The best sales are when you receive the cash at the earliest or in a well defined cycle. Use your discretion to extend credit to clients. In recession the chances are credit cycle will be delayed, so for uncertain credit best is to deal in cash.
- Plan for Future
A good thing about the recession is assets go under massive revaluation. If you believe in business cycles I certainly, do I think it is good time for looking out for assets which can add value, It can be Commercial building, offices, residential homes or even buying businesses. One shall look at what Central Bank is telling the markets. In the current inflationary cycle, CB is hiking rates but when they think they have raised the rates enough to cool the markets and is easing the hike or cutting the rates that is the time one shall look to buy assets.
Like everything else during recession, everything is open for negotiation. If you have been importing goods from overseas, it is good time to see if you can some discounts or extend credit cycle. Anything which is not a fixed price contract is open for negotiation, A business which might have sold for a 1 Mio NZD 9 months back and you think the real value is close to 1 Mio NZD during normal cycle, you might get for 750k or 800k. A Shop which might have gone for 700k can be negotiated to 450 or 500k. Use your discretion to evaluate and see where you can save cash.