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How to shield your small business from a downturn 7th September 2017

Knowing your figures and keeping a lid on costs can help your small business survive challenging times.

In March 2017, Australia took the record for the longest period of uninterrupted economic growth in the developed world. But while business owners have enjoyed 26 years of good times, an Australian property market crash or international political instability could see consumers slamming shut their wallets and purses.

 Certainly, business owners don’t seem to expect the country to keep defying economic gravity indefinitely. According to a 2016 Vero report, Australian small business owners ranked an economic downturn second on a list of most concerning business risks.

Here’s some practical ways to prepare for a worst-case scenario.

Never get complacent

Knowing exactly how you’re positioned is key to ensuring you’re not blindsided by events, says Acceler8 founder Tanya Titman. Titman is an experienced accountant and small business coach who helped her clients navigate the GFC turbulence at the end of last decade. She advises staying abreast of the relevant financial figures for your business. “If you’ve got to start cutting back, you need to be across the details of your monthly and annual expenditure so you can see exactly where you can afford to do so,” Titman says.

While it may not be the happiest mindset to maintain, Titman suggests business owners constantly assume the worst could happen. “Operate like you’re heading into a crisis all the time,” Titman advises. “It keeps your business thinking sharper and will motivate you to make difficult decisions rather than allowing issues to fester. Plus, if you are ever forced to embrace austerity, you’ll cope much better, practically and psychologically.”

Keep your rental options open

Rent is typically one of a small business’s biggest fixed expenses. Despite the tempting discounts on offer, business owners should think twice about committing to long-term leases. It’s always good to have the option of moving to smaller, cheaper premises if revenues decline. Also, there are a burgeoning number of well-appointed but cheap co-working spaces springing up across Australia, such as wework, Fishburners, Hub Australia and Gravity.

Prepare for currency challenges

Currency fluctuations often accompany a downturn. They are a double-edged sword for business owners. If you’re an exporter, a drop in the Aussie dollar will work in your favour by making your prices more competitive offshore. Conversely, if you’re selling imported goods, you’ll be paying more for them. So, you’ll either need to slash your profit margin or convince nervous consumers to start paying more for what you sell.

It’s possible to minimise the dangers of currency fluctuations by hedging. This essentially locks in a fixed exchange rate regardless of what the rate is at the time of the transaction. There are a variety of ways to go about this but in most circumstances it is simplest to just ask your business banker if they can arrange this for you given most banks offer the service.

Insure against bad luck

If you supply goods or services on credit, you should consider taking out Trade Credit Insurance. This can provide cover in cases where a customer goes broke still owing you money. That’s something that can happen even in the best of times and something you should certainly be prepared for if the economy goes south. We can advise you on the right trade credit coverage for your needs.

A lesson in downturn proofing

Brisbane-based Daniel Brady soon learnt about weathering downturns after launching Heavenly Hammocks in 2014. It turned out consumers buy plenty of hammocks in the warmer months but not during winter, when Brady estimated his profits to be “roughly zero”. Brady’s solution? Shift to cheaper storage facilities and expand his product range by introducing related but less seasonal products, such as swings.

“Given our low fixed expenses, we would remain profitable even with a reduction in sales.”

“Overall, the business feels quite safe from a downturn,” he says. “Given our low fixed expenses, we would remain profitable even with a reduction in sales.”

As Brady’s story demonstrates, the things you need to do to downturn-proof your business are pretty much the same things you need to do to keep it viable in in any economic conditions. Keep a close eye on your financial data, don’t prevaricate over tough decisions, control costs and take out the appropriate insurance and your business should enjoy healthy profits in the booms and be sufficiently well run to make it through the busts.

24 August 2017

https://www.steadfast.com.au/well-covered/business-edge/2017/08/economic-downturn.aspx