How can businesses navigate the storm?
As of the beginning of March South Africa has officially entered recessionary territory as gross domestic product (GDP) numbers for the fourth quarter of 2019 show that the economy shrank by 1.4%.
The fall means the country now finds itself in a technical recession which can be described as two consecutive quarters of negative growth after the economy declined by 0.8% in the third quarter of last year. This is the second such recession in two years, after experiencing the first one in the first half of 2018 largely attributed to the power cuts experienced due to Eskom.
Although a full recession requires other factors to be considered, over a more extended period – specifically a decline in the agricultural, transport, manufacturing and trade sectors, as well as a drop in expenditure on the real domestic product, a continuous slowdown in economic activity can still play havoc on any business’ bottom line and cash flow.
The latest data from Statistics SA ticks all these boxes, but these conditions typically have to persist over a greater period, but what can smaller and medium-sized businesses do in the interim to weather this storm? Especially now that COVID-19 has taken over our newsfeeds, our imaginations, and sadly, our small business finances.
Should you cut costs, or get more ambitious with spending? Should you borrow and make sure you have a financial cushion, or get rid of all your debt and stay as lean as possible? Should you even be making any drastic changes to your business in the first place?
The following six steps can help you navigate the storm:
- Get your bookkeeping in order
Get your bookkeeping in order and produce financial statements regardless of whether you’re in a technical recession or not. In adverse times, the margin for error becomes a lot narrower. When you have up-to-date and accurate financial information, you can always see exactly where you stand financially and make better decisions.
- Reduce monthly cash flow
Reduce your monthly cash outflows, especially on discretionary spending like magazine subscriptions and entertainment.
- Pay payables later
Call your vendors and get better terms. For example, you may be able to get 45-day terms instead of 30-day terms. Having cash on hand for an extra 15 days may be crucial in your survival.
After slicing your expenses and cash outflows, the next step is to increase and speed up the inflow of cash.
- Collect receivables sooner
Offer your best customers a discount for paying sooner, for example, or launch campaigns that will boost cash sales. You may also be able to reduce the amount of inventory you’re holding and free up much-needed cash. Perhaps you can you increase the frequency of deliveries (and lower the size of each shipment) from your supplier.
- Debt and interest payments
In the firing line is the number one killer of small businesses during recessions: debt and interest payments. Prioritise debts from highest rate to the lowest rate and start paying down the highest rate debts. High-interest rate debt should be addressed first since you do not want that to accumulate and become a greater debt in the future.
- Create a sufficient cash buffer
Creating a sufficient 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. But at the end of the day, small businesses are better off doing what they should always be doing: not overspending, making sure they have a financial cushion, and keeping an eye on the long term.