(recession proof – 5 minutes)
Over here in Aotearoa NZ, the numbers are out. We’re in yet another technical recession. We won’t go into details about how the recession happened. In short, rising interest rates have caused inflation to slow down, which is also causing the economy to slow down. If you want to know more about recessions, check out this article here. This article is aimed at small business owners who want to build business resilience and recession proof their business. Let’s get proactive and get into it!
Is your business in a recession proof industry?
This is important. The recession won’t affect all businesses equally. A general slowdown in the overall economy does not equal a slowdown for your business. Conversely, a period of economic prosperity doesn’t necessarily mean your business will be doing well. In a recession, certain industries will be more impacted than others. Here are the industries mostly likely to face the impacts of a recession:
Construction and building
Supply chain issues and rising material costs have hit the construction industry quite hard. Businesses and retail clients may be less likely to have discretionary funds available for construction projects in a recession. However, remedial work and maintenance contracts will likely remain unchanged as this type of work needs to happen, regardless of the economic situation.
Retail
Retail is a broad group comprising businesses that on-sell products to consumers. General grocery shops will remain mostly unaffected by a recession. Luxury retailers will find that consumers won’t spend as much on their goods in a recession. Some types of retailers (such as liquor and gaming) may even find sales increase during a recession as consumers seek comfort products to distract from the harsh realities of the recession.
Hospitality
The hospitality and restaurant industry has not fully recovered from the effects of the COVID lockdown. In past years, inflation has caused their cost of ingredients to rise. Hospitality will be facing the biggest hit from the recession. Consumers will choose to eat at home instead of eating out to save costs.
If your business is not in any of these industries, you can breathe a bit easier now. You’re less vulnerable to a recession. There may be a trickle down effect if your clients belong to any of these industries. Sales might dry up a bit but otherwise, you’ll be fine.
The next few tips applies to both vulnerable and less vulnerable businesses.
Forecast, budget and then implement
Forecasting and budgeting often get mixed up with one another. You will need to forecast first, then budget. Here’s how it works:
Forecast
Forecasting is the act of planning the next 6 to 12 months for your business. This involves projecting the amount of sales you will make, planning when expenses will be incurred and anticipating how the economy will affect your business. It can be difficult to do on your own – so talk to your accountant about setting up some forecasts for you.
For example, you are a furniture retailer. Over the coming 6 months, you expect sales to trend downwards as your customers have less disposable income. You can forecast a 10% average sales reduction over the next 6 months. Historically, you know that customers buy more furniture over the holiday period – so you can adjust for a 30% increase in sales over those months. Combine this with how much cash outflows occur in your business each month and you’ve got yourself a rough forecast of business performance.
Budget
Budgeting is where you set limits on spending on your business. Once you’ve set up your forecasts – you can design a budget around the forecasted sales and expenses you will be making.
Using the same furniture retailer example, you may want to set a budget on how much you are spending on your inventory. You can create the budget to be a percentage of your monthly forecasted sales. Or you could identify a month in which you will acquire a large amount of stock, and set a value which you should not exceed.
Implement
Most importantly, you need to implement your forecast and budget.
For example, if you are a food truck operator and you’ve forecasted based on attending certain events around town – you must attend those events on the dates they are happening. If you’ve budgeted to spend only a certain amount on ingredients – you must ensure you stick to the budget.
That being said, remember to be flexible in your implementation. Using the food truck example, you may learn of another event that you can attend to make more sales – feel free to attend that event even if it wasn’t planned for. Or a key supplier of your business has increased their prices – you may have no choice but to increase what you budgeted.
Implementation is all about executing your plan and adapting to the changing business situation. If the environment changes, feel free to change up your forecast and budget based on what you’ve learned. It is good to do these forecast-budget-implement sessions on a regular basis as it helps you stay on top of things.
Recession proofing your vulnerable business
Are you in construction, retail, hospitality or any other sector that is vulnerable to the recession? Here are some tips for you.
Freeze hiring of new staff
You’ll have to put your growth plans on hold for now – until the situation clears up. It may be tempting to hire new staff – but with consumer spending reduced, you will want to put a freeze on hiring. Consider engaging freelancers or part-timers if you need manpower in the short term.
Downscale your business
If sales have gone down, consider downscaling. Downscaling isn’t downsizing, as the idea is to retain the staff that you already have. Downscaling means to be more picky about the jobs you do, the items you sell or the food you put on your menu. Focus on products/services that have higher margin and are easier to deliver. This way you’re still maintaining a steady cash flow without spending large cash outlays.
Downscaling also means buying up less stock. If you are a retailer – use this opportunity to launch a sale to clear out some of your old stock. That will help encourage customers to buy more of your product. You should know best which products/services can be easily delivered to your customers with minimal cost outlay.
Talk to your customers
Ask your customers why they are spending less. The recession won’t affect all people equally. Customers who have lost their jobs will be less likely to spend compared to those with a job. Understanding what drives their spending habits. This will help you adjust some of your current product/service offerings to align with their new, recession-driven spending habits.
Cash is the best recession proof asset that you have
Ultimately – cash is still king. When the going gets tough, companies with cash reserves to rely on will come out on top. These are the companies that can still continue paying their staff and keep the business running. If the recession hasn’t yet impacted your sales figures, I suggest stashing the extra cash away. If you don’t have cash lying around, it may be worth looking at short term loans to ensure that your business’ operating costs are covered.
You can do this! Stay strong and most importantly,
Stay positive!