Would your business survive if a recession hit? While I don’t believe Australia is facing an impending recession in the immediate future, it’s not a question of “if” but “when” and there’s no better time to start planning than right now.
Small business owners are often too busy to think about contingency planning, but to ensure the future success of your business you need to think ahead, and start developing a plan that is flexible and adaptable to the changing environment.
While the banks might be open to business loans currently, when a recession hits, their attitudes will change in a flash. If your business is significantly exposed to bank debt during a recession, you will be like a ship without a rudder and your power to make decisions will be greatly curtailed.
You need to take steps now while conditions are stable to reduce your risk and exposure. Here are some simple tips to help you start planning:
Project your personal assets
Seek advice from your accountant and start working towards isolating your personal assets from business assets. Review all personal guarantees and, if needed, set up alternative suppliers who will supply you without needing a guarantee. Next, examine the exposure your home faces, and if things are looking dire transfer your home into a separate discretionary trust so it will remain secure regardless of what happens with your business.
Set up a survival task force
Whether you are an owner or manager, you won’t be able to handle the pressure of a recession on your own. It is like sailing a yacht into a perfect storm. Everything happens at once, you have to be agile and act quickly and decisively. Having a team around you to help guide the business is crucial, so surround yourself with the right people and help them understand their roles in the task force. When the time comes you will be prepared.
Reduce labor costs
Start by reviewing all roles now and refining processes. It’s not a pleasant topic to discuss but wages are one of the largest costs to a business. There is always room to reduce labor costs by at least 10 per cent and planning for this can commence right now. Always keep in mind when hiring new staff to use contracts rather than permanent employment, this will create greater flexibility if the time comes when you need to reduce headcount.
Build up financial reserves in your business by doing deals with your suppliers to obtain extended trading terms. Most will agree to this if you can establish a good payment record and this will alleviate some of the pressure on your cash flow.
Review your billings and collections functions
Do you have good processes in place to check the credit-worthiness of new customers? Reviewing and establishing well drafted business trading terms will make sure you’re not caught out. These terms should be included in customer contracts with the clause that if a debt gets referred to a debt collection agency, all debt collection costs will be added to the debt and will become payable by the defaulting customer.
Reviewing your debt collection processes will significantly reduce your outstanding debtors. Just as you want to defer payment to your own suppliers, you want your customers to pay you quicker, thus generating liquidity within the business.
Never skimp on customer service
Be careful not to get caught up in the trap of cutting prices to attract business. This is a strategy many of your competitors will use but, in reality, it’s a pathway to disaster. Start by determining the profit margin your business must achieve to remain operational and, instead of dropping prices, start building a loyal customer base. Whether you are a startup or established business, improving your customer service will help ensure your customers support you in the good times and the bad.
If you only remember one take-away from this article it’s that you need to start recession planning now, because when it hits, it’s already too late.
About the author
Roger Mendelson is the author of Business Survival Guide, published in 2009 at the time when Australia was predicted to suffer the effects of the Global Financial Crisis. He is CEO of Prushka Fast Debt Recovery Pty Ltd and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Prushka acts for More than 55,000 small to medium size businesses across Australia.