A positive mindset, a keen eye on cash flow and a willingness to diversify are the keys to managing economic downturn, according to small business owners.
The official cash rate is at an historic low, and new warnings were levied this week about Australia’s economic prospects over the next twelve months following a weaker than expected 1.4% expansion in GDP for the year to June. So there’s no shortage of questions swirling about where the economy is headed.
The beleaguered retail sector, which is particularly sensitive to changes in economy-wide demand, is already struggling, although there are numerous explanations for this, many of which relate to technological disruption.
For some, decline is already apparent. Mobile invoicing company Invoice2go yesterday released a deep dive into the health of their 29,000 small business customers, finding their average dollar amount invoiced per month declined 7.6%, or $8,315, in the year to July 2019.
It’s a worrying trend, which saw a decline across every sector the company was tracking except for the plumbing and HVAC sector, with the worst contraction occurring in interior design, which fell 22%.
“After analysing our users’ invoicing activity, it’s hard to deny what are clear signs that point to a downturn, at the very least,” Invoice2go chief executive Greg Waldorf said of the findings.
While precisely no-one is in a position to predict whether a recession is on the way or not, and a downturn is itself often a self fulfiling prophecy, business owners SmartCompany has spoken with say they’re hoping for the best but preparing for the worst.
There are also those who suggest instability, a precursor to a possible crash, is an intrinsic feature of market economies. That is to say, even if a downturn isn’t on the horizon for the moment, being prepared is probably a wise move.
With that in mind, there are some steps small firms can take to help ensure they’re on the front foot in the event of a difficult period.
Cash is king but so is optimism
For James Eling, owner of IT services company Extreme Networks, dealing with economic downturn is nothing new. A business owner of more than 20 years, Eling managed to grow his company through the Global Financial Crisis in 2008/9 and now employs 23 people.
Eling tells SmartCompany a positive mindset can do wonders in the face of problems much bigger than any single business.
“Remain optimistic. There are some businesses who just accepted the fact the economy was tanking and they were going to take the hit,” Eling says, recounting the 2008/9 period.
“If you are optimistic, you realise there are opportunities out there, I’m always trying to skate where the hockey puck is going to be.”
Being agile is a key strength for small firms looking to stay on the front foot in trying times. But, as Eling explains, having some money in the back pocket can be the difference between moving fast and being left behind.
“We’ve got a bit of cash allocated, so if some of our competitors go under we might be able to purchase them,” he says.
“Cash is king. There will be shocks, but managing cashflow is super critical.”
Build resilience and diversify
The prospect of a downturn can also be a good time to invest. Eling recently dropped $30,000 on building a new facility within his office, which will operate as a co-working space.
The benefit of this is two-fold. Eling had space in his office the company wasn’t using, and recognised a need to diversify his company’s revenue stream to guard against any adverse shocks over the next 12 months.
“It’s about assessing your strengths. A good old fashion SWAT analysis can help.
“For us, we’ve got all this space we should do something with. We could have leased it out, but that wouldn’t have created as much value,” Eling says.
Martie-Louise Verreynne, deputy head of the University of Queensland Business School, agrees diversification is an important part of building resilience into any small business.
“What we know about resilient businesses is that they are better at anticipating change and solving problems,” Verreynne tells SmartCompany.
“Build in some adaptiveness so you can change very quickly and you don’t become slow.”
Finding a way to build that resilience is the key though. Verreynne says creating a model where there’s enough slack for a business owner to work on their business, rather than just within it, is critical.
“One of the best things you can do is create thinking time for you as a manager … you need to spend time working on your businses and knowing what the opportunities are.”
Downturn also creates opportunities
Verreynne says business owners should remember that economic downturn doesn’t necessarily mean the entire economy will tank at the same time. That means there are ample opportunities available for businesses ready to seize the moment.
“Try to understand whether your sector is going to be hit and think about how you can diversify so you aren’t exposed to that particular sector,” Verreynne says.
For example, earlier this week we heard how small business home loan lenders such as Athena are capitalising on the big banks’ refusal to pass on the entirety of the RBA’s interest rate cut, by offering a better deal to customers.
Eling agrees, saying bad news doesn’t mean there aren’t good stories around as well.
“Some businesses are going to be hit hard, but others will actually benefit if the economy turns,” he says.
Be honest and collaborate
Michelle Hargreaves, founder of NSW-based small business That Ladie Tradie, says she’s found being open and honest with clients, employees and her agents about the dips and dives of doing business has helped immensely.
“If I’m struggling, I put the word out there to my agents and everything,” Hargreaves tells SmartCompany.
This includes being upfront with workers about how business is going, particularly in an environment where it can be hard to come across good employees.
“I try to let my employees know in advance if there’s not going to be work, give them dates and some time,” Hargreaves says.
“It gives them the opportunity to find other work instead of dropping it on them last minute.”
Hargreaves is also taking steps to smooth out the inconsistency of work in her industry, working with other businesses in a collaborative effort to keep a steady flow of business in her networks.
“I’m teaming up with another company so that we can help if he’s a bit slow and they can lend a helping hand when we are,” Hargreaves says.
“It makes the biggest difference, and it makes you look good because you’re getting the work done for clients.”
Verreynne says collaboration extends to suppliers as well, suggesting businesses that seek community tend to do better than those that don’t.
“A connected business is always better off than an isolated business,” Verreynne says.