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Economic downturns: How SMEs can survive

When the economy hits a rough patch, small and medium businesses suffer first and often worse than their larger counterparts. But why is this, and how can consumers and businesses owners best withstand economic shocks? 

Since the start of the pandemic, we have seen small businesses suffer through lockdowns, reduced capacities and COVID-19 restrictions. These issues are specific to the current economic downturn. Aside from and on top of this, businesses face the more widespread impacts of reduced consumer spending. 

Economic slowdown

An economic downturn is the general slowing of economic activity over a continual period of time. 

Some Australian economists have suspected that Australia’s economy has been in recession for at least two months. On Wednesday the June Quarter GDP data will be released and Australia will know for sure if its economic activity has contracted. GDP data is used to determine the official definition of a recession. However, there are many other signs of an economic downturn. 

The telltale signs of an economy entering a downturn or recession include rising unemployment, low consumer confidence and declining investment. But, the overall cause and effect are reduced spending in the economy. 

A slowing economy can result from many things; in the case of 2020/21, the COVID-19 pandemic is to blame. As many businesses entered hibernation, so did the economy. In 2020 the effects of what would typically be described as “mass unemployment” were mitigated by JobKeeper and JobSeeker payments. 

In 2021, small businesses are not faring much better. Without the economic stimulus designed to keep consumers spending, economic conditions will worsen. But why does this impact small ventures more than large corporations? And how can business owners proactively combat these economic shocks? 

Reduced spending 

Small businesses are often the first point of contact a consumer has with the market. They provide value-added goods from up the supply chain and deliver them directly to individual consumers. Think about a coffee shop, for example. Because of this, when consumer confidence and spending is reduced, small businesses take the first and most significant hit. 

A loss of consumer demand is the first significant effect on small businesses. As consumers become more frugal with their spending, the goods and services of local and small enterprises are the first to be taken off the shopping list. 

Small businesses offering essential services suffer less than those supplying luxury goods. However, because there is less ability to cut costs and often lower profit margins, all small suppliers struggle to compete with large businesses when money is tight.  

Angela Vithoulkas, leader of the Small Business Party and Sydney City councillor said that small ventures suffer because:

  • They don’t have the financial reserves or other revenue streams to rely on. 
  • They generally have personal debt/guarantees signed so greater risk profile.
  • They are easier and more susceptible targets of big suppliers/ landlords / stakeholders.
  • They rarely have resilience plans or risk mitigation plans. 

The COVID downturn

The downturn being experienced is unlike any economic slowdown to come before it. Small Business owners have found themselves in an unprecedented situation. While businesses suffer during forced lockdowns, the long term effects of constricted trade are causing headaches and heartache for many owners.  

Ms Vithoulkas said,  “The cumulative impact of lockdown/open/lockdown (in some states it’s six lockdowns) have been largely ignored. It’s as if people assume that small business is only impacted for the duration of the lockdown. They aren’t. They are strangled by two  things:

  • Fixed cost overheads that need to be paid regardless of revenue (rent, mortgage, insurance etc)
  • Increasing debt (to feed the vicious cycle without any revenue source)

Small businesses are suffering from an inability to reopen their doors even after lockdowns end.” 

Ms Vithoulkas continued: “Each time they come out of a lockdown requires investment to get the doors open again. Various health orders imposed restricted movements so foot traffic is down. Recovery cannot happen while there is ever the threat of lockdown. So debt, inability to service the debt, will most likely impact them forever.”

What can be done? 

The first thing small businesses can do when faced with an economic downturn is make a plan. When making a survival plan, some things to consider are what has caused the downturn, which industries are being most affected, and how your business can use these pieces of information to its advantage. By becoming more proactive and understanding the market, small businesses have the power to survive an economic downturn.  

“If [small business owners] sit down and have a solid look at their business and revenue sources and objectively evaluate their current financial reality and prospective financial reality, then they can make strong decisions,” Said Ms Vithoulkas 

The most obvious first move is to consider cutting production costs. If a business can cut costs without impacting the quality of the product or service, then this is a simple way of keeping afloat during tough times. 

Considering the future when making a downturn survival plan is essential. Cutting costs to the detriment of the brand, product or customer should be avoided. When considering finance, looking at the long term ability to pay a loan off is vital. 

Seriously assessing the viability of a business, and making informed and considered decisions will give a venture and the people involved a better chance in the long run. 

Ms Vithoulkas continued: “For many, they will not be able to ride out the hard times. They will need to make sure they don’t grow a debt that can never be paid off. There is no point risking your future financial security by pouring good money after bad.”

Small businesses are in a unique position to listen and understand what is important to consumers. Innovating is essential to staying competitive under normal economic circumstances; innovation is key to survival when the economy is slowing. 

By understanding consumer wants and needs in attrition to being able to shift products, services, and business models quickly, small enterprises will not only survive a struggling economy. Still, they will have a better product when conditions become favourable.  

During a downturn, marketing becomes an expense that most can’t afford. However, it is at this point where marketing is essential. Small businesses should find new and unorthodox ways to get their business out there and at the front of customers’ minds. 

“The business landscape will change, hybrid workplaces and changes in residential needs will influence location reliant businesses, and customer buying habits have had nearly two years to relearn habits. If you do have a business that will make it long term, then fight for it!”

Consumers can help 

Consumers have great power to support their local and family businesses when the economy is suffering. The sentiments of support and buy local become more important than ever. Ms Vithoulkas suggests that consumers can help by considering the following. 

  • Support local first, support small business first.
  • Work with [small business], if you are employees, suppliers or landlords. This is how we show we truly are #inthistogether
  • Buy Australian. 
  • Be understanding. More than 50% of small businesses right now are suffering emotional exhaustion, depression and mental health challenges.

The challenges for small businesses are greater than ever. The survival and recovery of small ventures will be the key to Australia’s overall economic recovery.  Both owners and consumers can take action to weather the storm. 

Read more: Australia facing its worst economic contraction in history

Read more: The big impact of small business

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