“During recession greed dies, frugality survives.” (Amit Kalantri, Wealth of Words)
With yet another return of loadshedding in August, and major banks upgrading their forecasts to reflect an increased possibility of further economic downturns, recession feels inevitable in South Africa. A recession is simply where an economy stops growing and starts retracting. A generally held definition of recession is when the Gross Domestic Product of a country declines for two consecutive quarters, or half a year. Apart from the shrinking GDP, recessions typically come with reduced employment opportunities and incomes, and a stalling in industrial productivity, all of which then impacts all other aspects of life from retail sales to reduced travel and entertainment. To be overly simplistic, when people are scared about their futures, they stop spending, which in turn means businesses, particularly those relying on consumer spending, stop making as much money and the economy has nowhere to go but down.
Businesses, already on the edge from years of pandemic, are preparing themselves to take yet another battering. Managing these economically turbulent times has become an ongoing challenge. Fortunately, though we have had numerous recessions before, and unlike the pandemic, economists are better able to predict the beginning, if not the length of recessions. We also have evidence for the things you can do to make sure these economic downturns don’t close your business.
Manage your cash flow
In even the best of times healthy cash flow is the key to a healthy business. This is doubly so in a recession. With recession coming it’s wise to take another look at all your expenses and cut out everything that isn’t 100% necessary, while also starting to build a healthy cash reserve. Is it possible to get a better price with another supplier while maintaining your quality? Can you renegotiate your rent? What extras can be trimmed from the budget, even if it’s just temporarily?
Sadly, this attitude also extends to your workforce. If you can afford it and your cash flow looks healthy enough, then keeping staff on is always the best solution as rehiring and retraining when the recession is over is expensive. However, if things are looking touch-and-go it might be wise to consider just who among your staff is essential. Moving your business to a model where you hire freelancers during the good times instead of bringing on full-timers, will ultimately mean that your lean full-time staff quotient is better able to weather the tough times. Remember not to fall foul of our labour laws in the process.
It is also important to ensure your money is coming in. In tough times it may not be as easy for your clients to pay you, and you need to get ahead of these situations. This is not a time to go easy on those who may have fallen behind on payments. Every cent you can recoup now is going to make the recession easier to navigate.
Take another look at your debt
When the economy is booming debt is a good tool for growing a business, but in times of recession it can be the added millstone that sinks you. Debt doesn’t go away just because your business may be experiencing a downturn, so now is the ideal time to visit your accountant and take a new look at your debts, repayment dates and deadlines and how they fit into your projected, possibly reduced, cash flow.
Paying off high-interest debt first is always a good idea. However, before things get bad it may, ironically, be a good time to renegotiate your debt agreements or even take on some added debt if you think you may struggle to meet other obligations during the recession. At the end of the day, lenders are much more likely to work with you on your repayments than see you go into default. Taking the initiative may well build trust between you and your business and lenders.
Don’t stop getting out there – recessions bring opportunity as well as risk
If you are anticipating a bad time ahead, then it’s likely your competition is too and it’s wise to remember that periods of downturn can often make the perfect time to grab extra slices of the market.
The first step is to nurture the client relationships you already have. Good relationships are going to help convince people to stay with you even if there are cheaper prices elsewhere and having strong relationships with suppliers and creditors will likely give you more wiggle room and time to pay off debts if the real problems start taking hold. Equally, there has never been a better time to market your business and start putting yourself out there for new work.
In recessions it will be tempting for your competition to slow down on advertising spend, leaving you plenty of room to be noticed. The reason for this is simple; advertising during a recession is likely to be seen by clients at just the time when they are carefully considering their current service providers and what they are receiving. By having your offering in front of them when no one else is marketing you give yourself a better chance of turning their heads in your direction.
Breakfast cereal manufacturer Kellogg is proof of this. Under the most difficult circumstances, when the market crashed in America in 1929, Kellogg doubled its advertising budget and invested heavily in staff and expertise. By 1933 their profits had increased 30% and they had grabbed their spot at the top of America’s breakfast company food chain.
Diversify your offering now
Don’t wait until the recession has hit to start making panic station plans. By diversifying your offering now, you will be ready to take advantage of gaps in the market that may arise due to the struggles of your competition. By now most companies are already online and selling their services and products direct, but diversification goes well beyond your online store. If you are in an industry that struggles during recessions, then expanding into products and services that don’t take a hit during tough times is going to give your company longevity. For example, basic essentials like toothpaste, medical supplies, food, baby items and in-house entertainment are all things people will need when their budgets get tighter.
Remember also to plan creatively. For example, the pandemic-fuelled shift to online purchasing hasn’t just boosted the profits of those suppliers and retailers that switched to online sales – companies that looked beyond the obvious and invested in packaging manufacture and in delivery services have also boomed.
Take professional advice!
Now is the time to be ruthless with your company, your products and your marketing. Getting advice from your accountant will allow you to accurately evaluate just where money may have become unnecessarily lost and will help you to spot areas of improvement. Additionally, plans can be put in place to ensure you do not struggle with your cash flow and that ultimately, you come out the other side of the recession as strong, or potentially stronger than you were before.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
© CA(SA)DotNews