How to Survive and Thrive in the Next Economic Downturn
Adrian Orr of the Reserve Bank (NZ) recently delivered a 0.5% Official Cash Rate (OCR) reduction, taking the OCR to a historical low of 1%.
He joined 3 other countries (India, Thailand and the Philippines) that week, that dropped their OCR rates, following in the footsteps of the US and Australia who did the same in late July. More countries are expected to follow suit in the coming weeks!
This is a pretty significant collective move and indicates an elevated level of risk in the global economy. Adrian Orr, in delivering the OCR cut on 7th August 2019, commented as follows:
“Global economic activity continues to weaken, easing demand for New Zealand’s goods and services. Heightened uncertainty and declining international trade have contributed to lower trading-partner growth.”
The obvious question to ask here is, whether this elevated level of risk in the Global Economy could precipitate into a Global Economic Downturn, to the size and magnitude of the last Global Financial Crisis (GFC), if not worse.
The prudent approach, if you are a business leader, owner or investor, is to ensure that your business is ready for such an event, as historical evidence suggest that most business leaders are either not prepared, or take too long to respond to such an event, and invariably businesses fail as a result, with potentially severe financial consequences for owners, investors, employees and their families.
Evidence also suggests that a handful of companies proactively recognise such a threat and are able to act early to ensure that they position themselves not only to survive but take advantage of this opportunistic climate, as a downturn brings with it opportunities as well as challenges.
In this blog article we will discuss, what business leaders can do to prepare for an adverse economic climate and what to consider when making “defensive plans” in order to respond to such an event.
Know Your Industry Exposure
Some industries tend to be more exposed to economic downturns. Industries such as building and construction related, discretionary consumer product sectors and accommodation tend to be impacted most during a downturn, whereas industries like healthcare, consumer staple products, energy and utilities are less exposed. Knowing your industry exposure will help dictate how swiftly changes need to be made, should the worst show up.
Cashflow is Key to Survival
Strong Financial Management including Planning and Budgeting plays a critical part in ensuring that the business remains in a cash flow surplus position. In a downturn scenario, businesses can be faced with rapidly declining sales. Good Financial Management will ensure cash is well controlled and cost out initiatives are undertaken swiftly in line with the reduction in sales.
Good Financial management will require holding optimal level of inventory, strong debtor collection disciplines and applying strict Return on Investment (ROI) hurdle rates on any capital expenditure.
Business leaders should be looking at building financial buffers and increasing lines of credit in the good times in order to survive the downturn, and take advantage of opportunities as they present themselves.
(If you require help with Financial Management, Budgeting, Reporting or want to learn how to make your business Financially Lean – contact us by email or clicking here. We have in-house Chief Financial Officer (CFO) expertise available on fixed cost or part time basis)
Prepare for the Unexpected
An economic downturn is likely to be accompanied by uncertainty on multiple fronts. Exchange rates could go against you or in your favour. Geopolitical tension could result in an increase in global trade barriers and tariffs accompanied by disruption to supply chain. Suppliers and customers could re-negotiate their trading terms, or may themselves become casualties of the economic crisis, and as another example, consider an uncommon deflationary scenario where the value of your stock on the shelf is declining over time due to general price deflation.
Prudent business leaders should be looking to stress test resilience to all the key facets of the business by modelling multiple scenarios, and to come up with responses to mitigate these risks.
Know Where You Make Your Money
It is important to know the Product lines that make money and the ones that don’t. Equally it is important to know who your most profitable and loyal customers are. A tip here is to substantiate the above with data and facts rather than simply relying on gut feel. Similarly, it is important to understand your cost to serve key customers and customer segments.
Knowing this in advance enables businesses to make smarter product or customer rationalisation decisions when it comes to letting go of non-profitable components of the business.
Understanding product and customer profitability requires businesses to have a good “handle” on their product costing and the cost to serve customers. It may also require businesses to tap into their own information system, which tends to have “oodles” of valuable data, for insights into trends and opportunities.
Focus on Transformation & Growth
Based on research, the handful of companies that come out of a recession stronger than their competitors are the ones that use the recessionary climate as an opportunity to create the urgency and “laser” focus to transform and reposition the business. Examples of this include shutting down rapidly declining or non-performing units/categories and investing in categories with stronger demand. Research also suggests that companies that continue to invest in R&D during downturns increase their chances of achieving an edge over their non-innovative competitors.
The Central Banks are taking, what arguably is a strong evasive action against weakening global economic activity. How effective these measures will be, only time will tell; however, it is prudent to take this time and opportunity to stress test how resilient your business is, if the proverbial hits the fan! We think the introspection will be well worth it, whether or not the worst shows up!
(We will keep an eye on how the economic situation plays out and will publish a more detailed guide on this topic if we think there is a requirement. Send us an email to register for a free copy of this comprehensive guide planned for release later this year)
Shakti Harduar is the founder of Paradigm5 Partners, a boutique advisory and investment company that helps NZ businesses to grow and build scale. Our services include strategic advisory, capital raising and getting businesses investor ready as well as helping businesses with geographical expansion. Paradigm5 Partners also helps owners build value in their business’ pre-exit or succession.
If you would like to talk to us about any of the areas mentioned in the blog, feel free to contact us by email on info@paradigm5partners.co.nz.