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Are you worried about the coming recession that the reserve bank want us to experience?

February 28, 2023

There has been a lot of talk in the media, from economists and even from the Reserve Bank of New Zealand about the dreaded “R” word - recession.

And understandably, many kiwis, and especially business owners, are worrying about how the predicted recession will impact them.

We will find out one of those impacts on February, 22nd 2023 when the Reserve Bank announces it’s OCR decision which many of the experts predict will be somewhere between a .50% and .75% further increase in interest rates.

Analysis to date suggests the OCR increases pulled more than $3 billion out of the economy in December, 2022 alone, with this impact to magnify as more & more fixed rate home loans come up for renewal.

Showing my age, or as I prefer to say, my experience, it the predicted recession does come true, which I think there is a high likelihood it will, this will be 5th recession I have been through. 

Recessions can be tough & challenging, but they also present opportunity for those who are well prepared, nimble and responsive. In fact, some businesses get even stronger during a recession and experience accelerated growth as the inevitable upturn in economy eventuates. 

If this one does eventuate, we all have had plenty of warning to prepare, and you can control how prepared you are, including getting smarter about cash flow, debt, marketing and inventory management. 

Being prepared to strike when opportunities arise is another to consider and we will touch on some of these below.

How to recession-proof your business

For the average business owner, prudent practices can keep things humming along in every economic condition. Here are eight pointers to help your business remain viable.

1. Keep yourself in great shape.

Your business will need you at your prime more than ever during a recession - a sharp, optimistic yet realistic mind supported by a healthy energised body helps weather the economic storm.

Eating well, regular exercise, mixing with positive, optimistic people & maintaining those all-important regular sleep patterns are key.

The other is to be appropriately action orientated without being too hasty. Worrying is like being in a rocking chair, both take energy and both end up going no-where. Don’t worry, assess & act, but without haste - give yourself time to make considered decisions allowing yourself to work through the options, potential upside and risks.

Look after yourself so you can look after your business - that is the biggest tip to getting through a recession and coming out the other side stronger than ever.

2. Take care of your cash flow.

Managing your business’s cash flow is critical during times of uncertainty, and many businesses fail because they don’t control it properly.

One way to protect your cash flow is to review your receivables promptly. In doing so, you might notice that some clients consistently make late payments or are flagrantly overdue. Resolve these issues before they become lingering problems or worse, bad debts.

As the legendary Warren Buffet said “It is only when the tide goes out that you find out who has been swimming naked” and recessions often quickly exposes those businesses with poor cashflow management practices.

3. Be smart about debt.

Many business owners see massive corporations taking on billions of dollars in debt and assume those companies are struggling to survive.

In truth, they’re typically using that money to grow their operations. The trick with financing is to maintain a healthy level of debt that generates profitable cashflow.

Always be cautious about racking up more debt than you can handle & factor in a 2% increase in interest rates to create a buffer in your planning. And only use debt where it creates value i.e. if the interest payments are $2,000 per month & it generates free cashflow & profit of $4,000, that is a good investment, if it generates only $1,000, you are going backwards at a rate of knots.

4. Double down on sales & marketing.

Don’t make one of the biggest mistake we have seen many business owners make when trying to improve cash-flow - they cut back on sales & marketing. And next revenue drops & then the cashflow death-spiral commences…..

One of the best pieces of advice I ever received was when the economy gets tough, double down on sales & marketing - for two reasons, your competition will probably pull back and secondly, there are often some great deals to be had, again due to lower competition.

And it doesn’t necessarily mean spending more, it means being smarter, looking at different channels, seeking out deals, and often doing the opposite to your competitors.

A good example is Microsoft Advertising which often delivers higher returns with more affluent customers.

Also look for new distribution opportunities to reach new customers in a cost effective way.

A cracking example of this is Buy Kiwi where your business can get in front of thousands and thousands of potential customers at a very low cost of entry.

5. Double-check your inventory management processes.

Doing things the same way for years on end might seem convenient, but it isn’t necessarily cost-efficient. While you’re reviewing your receivables, spend time examining your inventory practices.

Are you ordering excessive quantities of certain items?
Could you perhaps buy certain products at better prices from different vendors?
Or can you negotiate better payment terms such as 60 days instead of 30 days?

Consignment options are terrific for cashflow too, removing significant risk. There are many ways to cut costs, so don’t get caught up doing things one way because it’s what you’re used to.

6. Capitalise on your current customers.

Talking to your customers is a great way to size up your competitors and potentially increase sales. Existing customers are familiar with your company, and some of your loyal clients are likely more open to upsells. Being able to upsell and crossell pay off big time in a moment of need.

It’s also significantly cheaper to market to people who are already aware of your company and product offerings. Instead of traditional marketing avenues, you can simply offer these users access to perks, such as early access to new items or special discounts.

The one we have found the most successful is to understand what other products & services your customers use that you do not currently provide - this is a great way to get validation for new products to add and increase your sales.

As long as you show your customers how much you value them, they’ll keep coming back for more (and tell their friends to do the same).

7. Get a leg up on the competition.

Once you’ve secured your existing clientele, recession-proofing is all about finding ways to expand your customer base.

Whether you’re in a niche or mainstream market, that means taking customers away from your competitors.

If you aren’t familiar with other companies in your industry, it’s time to do some research. Watch their ads, sign up for their email lists, visit their brick-and-mortar stores and visit their social media pages to keep tabs on everything they do. Note any qualities that separate your business from theirs, and do your best to offer something unique.

8. Never stop marketing your business.

Yes, it is that important that it gets mentioned twice. Regardless of the economy, never stop marketing your business.

One fact never changes no matter what the economic environment is - “You can’t sell a secret”.

If consumers don’t know about your company, they can’t do business with you. A lean market allows you to distinguish yourself from other businesses by emphasising your superior product or outstanding customer service.

Explore paid marketing efforts as well as less expensive routes, particularly social media and video sites. Platforms such as Twitter, Facebook, Instagram, YouTube and TikTok offer excellent ways to draw consumer attention without breaking the bank.

Frequency of recessions

Despite countless technological, social and economic advances over the last century, we still haven’t conquered the business cycle. Recessions remain relatively frequent, around every 10 years with the last four recessions in New Zealand being 1974/75, 1982/83, 1991/92 and 2008/09.

Although the typical contraction is reasonably mild and lasts for less than a year, even a temporary slump can pose severe risks to a business’s cash flow. A significant number of businesses closed permanently following the pandemic led economic impacts of 2020/21 as they did not have the cash reserves required.. 

Silver linings of a downturn

The good news is that most of these slumps are relatively mild, and the New Zealand economy has seen very good growth over an extended period of time. 
When business is booming, many owners are preoccupied with keeping the wheels from flying off the bus, and it’s easy to overlook the details.

A slowdown provides the opportunity to refocus your business and address waste and inefficiencies that tend to creep in over time. It also often results in lower competition which presents opportunities for growth as the economic tide turns.

Regardless of the state of the economy, it’s important to prepare your business to weather any storm.

Prudent financial practices not only provide the foundation for a successful business, but they also afford assurance that your business will remain viable in both a strong market and a recessionary market.

Article courtesy of "Grow NZ Business"

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