There’s no escaping the fact that today’s economic climate is difficult for small businesses.
Several years of disruption thanks to the pandemic followed by high inflation means that as a small business owner, you are probably struggling and your customers are too.
Adding to the pressure you’re already feeling, the media is full of predictions of a looming recession.
Inflation and recession don’t have to equal disaster for your business. But you can’t afford to bury your head in the sand and hope that things will work out.
Lets take a look at what you can do to recession proof your business and deal with the impact of inflation.
What exactly are inflation & recessions?
We know that inflation and recessions sound bad. But what exactly are they?
Inflation and recession describe how fast the economy is moving.
Inflation means the economy is growing fast. Because we can’t keep up with the growth, prices go up. A long period of inflation hits household finances the hardest as the cost of living goes up and the same amount of money buys you less and less.
Recession means the economy has slowed down. People are spending less, so businesses make less, and usually unemployment rates rise.
How can your business respond to rising inflation and an upcoming recession?
Business goes in roughly a ten year cycle. You’ll have two years where business is booming, six years where business is stable, and two really terrible years which could potentially put you out of business.
The good news is that if you can survive the tough years, you’ll be able to thrive when the economy and business picks up again.
Here’s the four step process we use to help businesses prepare and respond to challenging economic times.
1. Understand the landscape
Understand how your customers will be affected by a downturn - how will their buying behaviour change? Inflation and recession doesn’t affect all people equally, so it’s important to understand your customers ability and willingness to purchase the products and services your business sells.
Understand the impact of a drop in revenue on your business - use scenario planning to consider what things would look like if your sales dropped by 10%, by 25%, by 50%?
Understand how much cash you need to cover your costs each month - remember to include all the payments that need to be covered including paying yourself.
2. Brainstorm your options
One of my favourite quotes is “It’s never about a lack of resources, but whether you’re being resourceful” – James Ashford
Over the years I have seen small business owners consistently prove how resourceful and tenacious they are. Being resourceful, how can you:
Increase revenue – can you sell more to new or existing customers, can you increase prices without losing too many customers?
Improve your margins – can you increase your gross profit through greater efficiency, less wastage, cheaper suppliers?
Cut overheads – can you reduce or eliminate the nice to haves, use more automation, delay hiring new staff and delay big asset purchases or new premises. Will you need to reduce the size of your existing team?
Negotiate payment terms – can you offer discounts for upfront or early payments?
Increase your access to cash – can you extend overdraft facilities, sell off slow moving stock and unused assets?
3. Take action
Taking action now is essential. You simply cannot afford to bury your head in the sand, because by the time you acknowledge you need to do something it may be too late.
Review your pricing – most business owners already have their prices set too low. When inflation is sitting at over 7%, you simply can’t afford to keep your prices the same. Communicate pricing increases carefully and with plenty of advance warning.
Focus on your most profitable products or services – cash is king right now, so review the products and services you offer and break them down into:
a) High sales, high margin
b) High sales, low margin
c) Low sales, high margin
d) Low sales, low margin
Aim to focus on increasing sales of your a & b products and get rid of the d’s
Respond to the potential changes in your customers buying behaviour with:
- Value offers – trial packs for new products, larger ‘value’ packs for popular products if your customer is cost conscious
- Money back guarantees for high ticket items or services to de-risk the purchase
- Incentives to encourage purchases now rather than later if your customer is wanting to delay
- Review your marketing messaging to focus on the benefits of your products & services if your customers are starting to compare pricing of alternatives
- Target your advertising & promotional activity if your customers have changed their consumption pattern
- Smaller ticket services or products if your customers are still wanting to spend, but their discretionary income has dropped.
Reduce the size of your team – the harsh reality is that wages is one of the biggest costs for most businesses. The decision to cut jobs is always difficult and heart-breaking. Unfortunately it may also be a necessity to ensure the survival of your business.
Best practice is to make a deeper cut than you think you’ll need so you don’t need to do it again in a few months time.
Restructuring your team requires a formal process and takes time. So take action early and please get an HR professional to guide you through the process.
4. Monitor progress
Track your key numbers weekly so you can quickly respond to any warning signs. Signs to watch out for are:
- Drop in new customer enquiries
- Increase in customer churn or abandoned shopping cards
- Increase in your accounts receivable days
- Decrease in average spend
In difficult times you need a good handle on your numbers
When you are making hard decisions about your business, you need to know exactly where you stand financially.
We can provide key financial insights, coaching and advice to help you make the right decisions based on accurate data and rational thinking.
All you need to do is book in a time for us to chat about your business.