LISTEN: Ways SMEs can recession-proof their businesses
CAPE TOWN – The Minister of Finance Tito Mboweni sketched a very grim economic outlook when delivering the National Budget Speech in February, which, however, showed that South Africa’s future was not secure.
Considering the minister’s statement on the country failing to even meet gross domestic product (GDP) growth of 1 percent, the recent revelation of South Africa slipping into a technical recession was hardly a surprise and was indicative of what is yet to come with regards to our credit rating, according to market commentators.
Despite the country falling into recession, coupled with a dim economic outlook, it is not all doom and gloom for small businesses.
Andiswa Bata, FNB business regional head for Gauteng South West, said on Thursday that for many small businesses the outlook for the year ahead seemed bleak due to a lower forecast for economic growth globally, challenging local trading conditions owing to the inconsistent power supply, currency volatility and rising operating costs, among several factors.
However, opportunities still existed for small and medium enterprises (SMEs) that were agile.
Bata unpacks simple strategies that businesses should consider to navigate economic headwinds in the short to medium term:
Cash Buffer - a cash buffer can help your business to take advantage of opportunities quickly, survive unexpected knocks and remain competitive when the price can be the difference between winning or losing market share.
“There may even be an opportunity to acquire/merge with a competitor or another company that complements your own offering. Having spare cash sets you up as a potential buyer, at a time when business valuations may be attractive. If the pie isn’t getting bigger, seek to secure a larger slice,” says Bata.
Inventory Management - move inventory into buyer’s hands quicker, collect on receivables quicker and reduce operating costs to free up the cash you have in the bank for investment in the right opportunities as they arise.
Creative Cost Cutting Ideas – consider cost-cutting initiatives that will have a positive impact on your business and staff.
For example, consider sharing or renting office space and use that money to spare a job. Buy used or rent equipment/tools, if buying new is too costly. Make use of technology to improve your productivity and efficiency. Relook your operating model with the view to become faster and cheaper in the way you deliver your products/services.
New Markets - identify those markets and geographic areas where opportunities still exist. Tailor your offering to meet previously under-serviced markets. If a traditional, premium offering is not selling, evolve your offering to include solutions at lower price points – which may prove more resilient in tougher times. Know what customers are willing to spend money on and service that deliberately.
“You cannot expect to fill up the bucket if there is a leak at the bottom. So, if you are pursuing new markets (to top up the ‘bucket’), do not forget to ensure you protect your existing client base by striving to deliver superior quality and service every time,” cautions Bata.
Use Debt Funding Wisely – lower economic growth typically paves the way for a lower interest rate environment – where appropriate, take advantage of this for investment (not consumptive) expenditure that also reduces your business’ reliance on external power and water supply.
“Finally, support other local businesses and brands wherever you can. Do not underestimate how much your own personal and business buying power is helping to stimulate the local economy, creating employment and keeping fellow businesses thriving,” she said.
Daniel Goldberg, co-founder of Bridgement, a Fintech company offering invoice financing to SMEs noted that some of the most successful businesses had been built during economic recessions, including Apple, Microsoft and Burger King.
He said SMEs had the inherent agility and determination required to spot opportunities and use the state of the economy to their advantage. While downturns were difficult to predict, small business owners could prepare for them.
“SMEs are primed for spotting new opportunities in difficult times. With less access to capital, small businesses need to pay close attention to detail and focus on measurable results, enabling them to grow and maintain a competitive edge in the market,” said Goldberg. “Small businesses have the capability to make nimble and quick decisions, which aren’t possible in the structures of big business.”
A tough economy does not always spell bad news for business. Goldberg offered his tips for SMEs to grow during tough times:
- Protect your cash flow – for small businesses the most important aspect of day to day business is avoiding extended cash shortages. Try to maintain steady cash flow and consider opening a line of credit to fund short-term problems.
- Create firm payment structures – be strict on payment deadlines and consider implementing a penalty for late-payments and discount for clients who settle early. Engage with your suppliers and negotiate extended payment terms on your side.
- Optimise business processes – spend time identifying any inefficiencies in the business and work out systems to streamline these through technology and other means.
- Reduce waste – Business owners should see what can be done to reduce inventory costs without sacrificing quality. Cut unnecessary costs but ensure that you maintain enough to keep your business going in the long run.
- Keep existing clients happy – by gaining a deep understanding of what your clients want and need, you can tailor your products and solutions to these, increasing their spend with you. This is more feasible than developing new products with a higher risk.
In a time of constrained economic growth, it is important that small businesses take proactive steps to recession-proof their businesses. “Often, SME owners will adopt a survival strategy, which involves severe cost-cutting. These provide short-lived benefits and can damage their businesses in the long run,” said Goldberg.