A recession may be on the horizon. Here’s how Australian SMEs can prepare for it
With some analysts estimating the risk of recession in Australia over the next 12 months at 50%, here’s how SMEs can best protect themselves.
The cold winds of recession are whipping up across the globe with some analysts estimating the risk of recession in Australia over the next 12 months at 50%. Without a doubt, many SMEs are likely wondering how best to protect themselves. As consumer pressure continues to increase, there’s a possibility that businesses will start cost-cutting and scaling back their operations pre-emptively. But this approach risks creating longer-term problems for those businesses. History shows us that during tough times, it’s critical to balance both protecting the business with keeping an eye open for meaningful opportunities.
Inflation is a complex concept, not experienced equally by different sectors or consumer groups. The headline inflation rate is typically measured on the basis of a basket of goods and services purchased by households. However, this doesn’t necessarily reflect the reality of inflationary pressures for businesses, which can be far higher (or lower) depending on what sort of business it is. Some sectors suffer extremely high inflationary pressure in discrete areas, such as energy costs or the costs of building materials.
Whether inflation is impacting your business or not, here are some tips for SMEs in the face of a recession.
Focus on your core business
Heading into a higher inflationary cycle is generally a red flag, but SMEs need to look at the specific costs in their business, e.g., where will they be most affected? If the cost of goods and materials isn’t manageable, what are the options in terms of alternative suppliers, fixed contracts, or buying in bulk?
Additionally, consider where your customers might be at risk. Are they having to cut budgets (for B2B businesses) or slow down discretionary spending (for B2C businesses)? Something to note is that in recessionary periods, people tend to default to brands they trust, even if there’s a price premium. Consumers become more risk averse and prioritise perceived efficacy and reliability benefits. Does your business or product have strong brand equity? How can you leverage this competitive advantage during a down cycle?
Speaking of competitive advantage – this is critically important in recessionary cycles. You have to be better if you’re going to sustain an advantage. McKinsey defined this as its number one rule for growth: “Mastering this rule makes companies 1.3 times more likely to outperform their industries on shareholder returns”. Don’t be afraid to prioritise profitable sectors and even walk away from marginal customers. Even if revenue is flat, overall profitability might be up.
As you think through your core business, it’s a good opportunity to take a fresh view of things you haven’t looked at for a while. Is there better or newer software, a different vendor, or a way of doing things so you can maximise opportunity? For example, are there business processes you can automate, such as using OCR (optical character recognition) to cut down admin in the finance function?
It’s a good opportunity to take a step back and with a clear head look at what you could be doing smarter and more efficiently. This can translate into a competitive advantage where you use saved cash to market more aggressively, which then becomes a compounding benefit.
Keep an eye on opportunities
With one eye on your costs and your core business, your other eye should focus on latent opportunities that might be presented in this environment. Competitors may go broke or pivot, creating a fantastic gap for you to double down on marketing in particular areas and grab market share. You might also be able to buy more assets such as equipment in a fire sale to help you expand your own operations. We’ve seen recent examples of this in Australia, such as Woolworths snapping up struggling grocery delivery startup Milkrun, or meat subscription startup Our Cow grabbing the assets of Voly, another defunct grocery delivery startup.
Even if you need to borrow money, it’s important to look for opportunities that will emerge out of this time. However, if you’ve focused on your core, you should be generating good cash flows and be able to fund strategic opportunities that come up during the cycle. This also extends to headcount: if you lay off too many people, you won’t have the resources you need when the pendulum swings back. And worse, your competitors may have snapped them up. Layoffs are hugely risky in a tight talent market.
SMEs actually have an advantage when it comes to pivoting or grabbing new opportunities during a recession. Larger organisations see the headwinds coming and start proactively turning off the taps, as they need to reassure shareholders they’re responding to market conditions. SMEs don’t need to take such a conservative approach. They are nimbler and can be far more tactical. It’s easier for an SME to invest than a multinational with a global mandate to cut costs.
“Flat is the new up”
In a downturn, simply keeping things even and above water is an indirect form of growth. When the cycle turns again everybody lifts, but you’ve got a head start. There’s a swathe of research over past decades that demonstrates how marketing can be a significant competitive advantage in a downturn. Businesses committing to marketing and advertising enjoy a much faster bounce back when markets recover. Kellogg’s is the classic example: it emerged from the Great Depression as the market leader for breakfast cereals.
Ultimately, don’t try to cost-cut your way to prosperity: it’s rarely a winning formula. You will end up losing ground that you may not be able to regain. Keep the lights on as much as possible while scanning the horizon for potential opportunities.
Ryan Williams is the director of the Australian Centre for Business Growth.
