There has been plenty of talk about whether or not NZ is headed for recession. BNZ says the risk is increasing but Treasury says we will probably avoid one. Many an armchair economists has waded in, and an assortment of pop-culture indicators are pointed to as evidence that we are or aren’t in for a harder time.
Predicting the economy is a lot like forecasting the weather and even the most well-known economists tend to get it wrong more often than right. So we’re not going to navel-gaze as to what might happen. But, as always, we should hope for the best and prepare for the worst, so what can you do to be in the best position to handle a more turbulent economy?
A great place to start – what is a recession? Simply, a recession is a decline in economic activity that lasts for at least 2 consecutive quarters. When put in such simple terms, it doesn’t sound too scary, right? For most small businesses, a decline in economic activity = less sales. And less sales eventually = less profit.
If you are expecting a recession, then what can you be doing now to prepare for it?
Plan. I mean this from two perspectives. First off, work through what might unfold and what that would mean for your business. For example, what would a 10% reduction in sales mean, and how would you cope? What about 15%? Once we have an idea of what the impact might be, the second step; have a plan – a roadmap – for your business. There is a bunch of studies that suggest businesses that have a viable plan are more likely to thrive, so plan.
Understand your margins and cost base. We live in a time of relatively high inflation, this means that there is potential for a double whammy of cost pressure as well as pressure on sales volumes, both of which cut into margin. Understanding how much of these pressures your business can handle is key to being able to make quality decisions quickly.
Leverage what you’ve got to improve efficiency. Small businesses are notoriously bad at partly implementing technology, using half a system and being overly manual and under systemised with processes. What existing technologies or resources do you have that you could be putting to better use?
Keep a close eye on the gauges. What are the top 3 – 5 key performance indicators – the forward looking, predictive measures that give you a strong indication of the future health of your business? These should be watched like a hawk. Perhaps a KPI for your business is the number of quotes per month. If that drops below acceptable levels, acting quickly can nip an issue in the bud before it snowballs.
Have access to capital. One of the more miserable problems to have in business is a cashflow crisis. It’s no fun at all. Most small businesses in NZ are funded by the owners of the business, and many are undercapitalised, meaning that it only takes a little bump in the road to cause a business to run out of cash. Its far easier to get access to cash when you don’t desperately need it, so having access to cash reserves or a line of credit is like a good form of insurance.
We don’t know how much of an economic slowdown there will be, or if it will result in a recession, but if you have these things in place, your business will be more resilient irrespective of the conditions. If you need help with any of the above, please contact us.
If you are looking to understand a little more about the drivers of inflation and what might lead to a recession, take 15 minutes and watch this video from Economics Explained (despite having the word ‘economics’ in the title, it’s actually pretty interesting!)