Top tips for recession-proofing your business

While there is no silver bullet to recession-proof your business, there are some things you can do to manage the business through the difficult times and position it for future growth.

Here are some of them.

1. Do a financial health check of your business

In an economic downturn, you should regularly analyse the financial position of your business, because its financial position will determine whether the business remains viable and whether it is positioned for future growth.

You can get a lot of information on the financial health of your business (and hence about how your business is performing) by analysing your financial statements through financial ratios such as liquidity ratios, solvency ratios, profitability ratios, management ratios and return on investment ratios.

Less formal indicators such as the value of daily sales, the value of next week’s pre-orders or the turnover of a key item of stock (such as the quantity of coffee beans a café goes through in a week) can also be indicative of how the business is performing.

You will get an indication of the financial health of the business when you compare these current ratios and indicators with past ratios and indicators and with those of similar businesses in the same industry.

For information on common ratios, see pages 26 to 29 of the Financial Survival Guide at a joint publication of CPA Australia and Small Business Victoria.

2. Improve your cash flow

Typically in an economic downturn, the most significant problem faced by many businesses is poor cash flow. Ideas to improve your cash flow include the following:

• convert your outstanding debt into cash
• prepare regular cash flow forecasts
• skew promotions to products and services that can be turned into cash quickly
• measure and reward the behaviour of your staff that improves cash flow
• make full use of your terms of trade
• don’t let personal drawings from the business get out of hand
• reduce stock levels
• replace slow-moving and obsolete stock with stock that has a faster turnover
• sell unnecessary assets
• seek finance from external sources

More information on improving your cash flow can be found in CPA Australia’s Checklist for Managing in Times of Financial Difficulty and chapter 3 of the Financial Survival Guide.

3. Improve or return your business to profitability

A profitable business is generally a successful business. Therefore it is important that while you improve the cash position of the business, you also aim to be profitable. Ideas to improve or return your business to profitability include the following:

• prepare regular financial statements
• focus on sales that give you the highest margin
• don’t discount on low margin products and services
• don’t discount unless you can achieve the same or better gross profit through increased sales volume
• control costs
• be flexible with your staffing arrangements
• don’t chase any sale; chase profitable sales

More information on improving your profitability can be found in CPA Australia’s Checklist for Managing in Times of Financial Difficulty and pages 15 to 20 of the Financial Survival Guide

4. Improve your access to finance

All businesses need finance to establish and grow. Finance can be provided from debt, equity and internal sources. Ideas for improving your chances of accessing finance include the following:

• disclose all necessary information required by the bank
• start to seek finance as soon as possible and shop around
• be sensible about the amount you actually need to borrow and be able to justify it
• take your time preparing the application as a well prepared business proposition is a good sign of a borrower’s commitment to a prospective lender
• if you fail in your loan application, find out why

For more information on accessing finance see page 55 of chapter 5 of the Financial Survival Guide at and for information on how to handle your bank, see chapter 6.

5. Do a SWOT analysis

In a downturn, you should adopt a risk management mindset and take stock of your business more broadly. You should therefore:

• conduct research to find out how your customers and competitors are responding to the current economic environment
• not starve your business of essential investment
• review your business operations and look for improvements

For more information on analysing your business, see Checklist for Managing in Times of Financial Difficulty

6. Make a marketing plan

With less money being available, it is important that your marketing plan helps you to achieve key objectives to get you through the downturn, particularly improving your cash position and profitability. Ideas for a marketing plan in a downturn include the following:

• focus on chasing sales that have a high margin and bring in the cash quickly
• reward staff for sales of higher margin products and when payment is received
• don’t discount unless it can lead to a better gross profit through increased sales volumes
• measure the success of each promotional activity or campaign
• focus on encouraging customers to pay at the point of purchase or to pay early
• use in-store signs to highlight a special or high margin product

7. Adopt appropriate risk management strategies

Downturns may expose risks to the business (from internal and external sources) which were not previously apparent and which may threaten its viability. Such risks include the following:

• relying too heavily on a small number of major customers
• relying too heavily on one supplier
• selling on credit
• reduction in demand for your goods and services
• fraud

For more information on risks and ideas to ameliorate them, see CPA Australia’s Risk management guide for SMEs

8. Other commercial considerations

Other commercial issues to consider in a downturn include:

• your terms of trade and other contractual issues imposed on customers
• your interests as a tenant if the landlord defaults
• breaches of debt covenants, value of security and personal guarantees provided to secure finance
• whether the asset protection steps taken by the business owner/director are effective
• reducing the size of your workforce, or alternatives such as reducing hours

9. Take advantage of opportunities

Businesses that find themselves in a strong financial position should consider opportunities to expand, for example, by acquiring competitors. The opportunities may be more favourable now because asset prices may be lower than usual and there may be less competition for them.

For guidance on undertaking a due diligence review see the Due Diligence – Working Guide

10. Consider exiting your business

Most businesses will trade through the tough times, some with greater success than others. However, some businesses affected by a downturn will not survive. There are several ways that a business can be wound up. These are discussed in CPA Australia’s Guide to Exiting Your Business at www.cpaaustralia.com.au/984_8268

For information on the consequences of insolvent trading, visit the Australian Securities and Investments Commission (ASIC) website or your accountant or lawyer could explain the risks to you.

Conclusion

Businesses that are well run use these ideas during both the good times and the bad in order to maximise their profits and minimise risk. Using them now can help your business to emerge in a much improved condition, which will likely lead to long-term growth.