How to survive an economic downturn
There is a great deal of uncertainty surrounding both global and Australian economic growth, and for every business commentator forecasting good times ahead, there are commentators predicting much tougher conditions.
The reality is that these forecasts don’t matter.
If you follow these principles you will be in a much better position to capitalise on whatever conditions materialise over the coming months and years.
1. Strategy, capital and people
To have a successful, sustainable business you need the right strategy, the right capital to fund your strategy and the right people to execute your strategy.
Therefore, you need to be able to answer ‘yes’ to the following questions:
- Have you got a strategy that clearly sets you apart from your competitors?
- Have you got sufficient funding in place to support your strategy, and is there a buffer in case economic conditions worsen?
- Can you honestly say that you have the right people in the right roles?
2. One to two big changes in strategy
When a business is underperforming due to external or internal factors, the majority of the time you will need to execute one to two big changes in strategy to rectify the issue and rebuild confidence in your stakeholder group.
This isn’t easy, but the answers are there – you just need to be disciplined and prepared to ask the tough questions.
3. Stakeholder management and communication
Confidence in the business can be shaken when industry or economic conditions deteriorate. In business generally – but particularly during downturns – there has to be a business culture of no surprises, and there needs to be somebody solely responsible for managing your key stakeholders. Keep in mind that in the absence of information people assume the worst. Most management teams do a poor job at this, so if you want to stand out, ensure you concentrate on stakeholder communication.
4. Develop a strategy to stand out from the crowd
As a business gets larger, the core purpose of the business often gets lost. As more and more staff are hired the passion and culture that was key to the business becomes diluted, and before long the business looks and feels like everything else in the market. When this happens, businesses are forced to compete on price, which is a downward spiral.
Can you honestly and objectively say that you have a Unique Selling Point (USP) that clearly separates you from your competitors? If not, then I recommend you begin a process to unearth, recreate or develop a USP, and integrate it across the whole of your business. This will be your best defence if economic conditions worsen.
5. Pay down debt
Businesses and management teams almost always choose debt over equity to fund their business. Unfortunately, a lot of businesses over-gear themselves in the process. The more you focus on paying down debt by selling non-core assets, the more options you’ll have. Ultimately, the lower your debt to equity ratio is, the easier it is to withstand any economic shocks.
When times get tough the banks focus on those clients who have high gearing ratios. If you don’t want that level of scrutiny, pay down debt.
6. Strong financial management
Strong financial management is critical, as it ensures there are no surprises. You need to be able to rely upon strong and robust financials that are produced in a timely manner. Knowing if you’re hitting your critical KPIs is absolutely vital. At least 50% of the clients we work with have inadequate systems.
7. Maintain a focus on marketing and R&D
In a downturn it’s essential that you keep some resources available for R&D and innovation so that you can emerge from the downturn with new products and services rather than continuing to discount old ones. Most management teams don’t do this, so it is an easy way to stand out from the crowd.