The Reserve Bank hands down its next rates decision on 5 May.
The cash rate already sits at 4.10%. Markets and many commentators still expect at least one further rise on May 5, probably followed by at least one more. Against this backdrop, there is a federal budget trying to deliver on the social undertakings made to the electorate, while dealing with a structural deficit, soft consumer confidence, and geopolitical uncertainty, particularly as it relates to energy.
This is a toxic mix for SME’s, which despite being largely ignored by governments, are still the backbone of the economy.
That mix should sound familiar to anyone old enough to remember the 1970s. Growth stops, costs increase, consumers keep their hands in their pockets, and the cycle repeats.
That is when small businesses fail.
Whether the Reserve Bank raises again or pauses, the core message for SMEs stays the same.
Do not wait for certainty: Prepare now.
Tough times do not usually kill a business in one dramatic moment. They kill it by progressively tightening a dozen small screws at the same time. Debtors pay later. Stock turns slower. Quotes sit longer. Margins erode one discount at a time.
The businesses that come through rough periods usually do a few simple things early and do them hard.
They preserve cash.
They accelerate every cycle time in the business.
They protect gross margin like it is oxygen.
They stay close to good customers.
They cut vanity spending and keep useful spending.
And they remember an old truth Warren Buffett expressed well: when times get tough, cash gives you options. Opportunity often knocks when nobody feels like opening the door.
The following specific advice has been heard many times, but once more will not hurt.
Know your cash position.
Know your true cash position every week, not intermittently once a month, every week, or better still, every day. Chase debtors hard, but with wit and humanity, as they are probably also suffering as you are.
Run a 13-week rolling cash flow forecast. Update it every week. Assume at least some customers will pay later than promised because they will.
Accelerate cycle times.
Every process has an established cycle time that ‘settles’ into a comfortable rhythm when times are OK. When times get tougher, those that can accelerate their cycle times will win.
This is particularly the case with your cash conversion time. To speed that up, quote faster, invoice the same day, chase deposits sooner, work operational assets harder, and reduce if not eliminate rework. Get jobs finished, signed off, and billed without dead time between steps.
The lessons of John Boyd and his OODA Loop are never so relevant as in a crisis.
Protect gross margin.
Tough markets tempt owners to discount just to close the sale. That usually backfires. The better tactic is to sell on value, drop unprofitable work and reprice where you can.
Complexity creates transaction costs, which are always hard to see. Removing complexity frees up cash to be used productively.
Keep your best customers close.
Your existing customers are cheaper to retain and increase your share of their ‘wallet’ than new ones are to win.
Call them, collaborate to solve their problems, check in before they complain, and ask for referrals and testimonials.
Cut costs carefully.
Across the board cost cutting is a desperate mistake. Do not slash the parts of the business that help you sell, collect cash, or keep customers.
Cut the ‘vanity’ and nice to have costs aggressively, not the activities that generate revenue, margin, and cash.
Tighten inventory management
Stock that does not move is just dead cash.
Reduce slow-moving lines, buy smarter, Increase visibility on lead times and reorder points. Stop over-ordering to ensure ‘safety stock’. Aggressive management of cycle times in your inventory can have a dramatic impact on working capital requirements.
Pareto the pareto
Not all customers, and products deserve to survive. The Pareto rule always applies, not always as 80:20, but it is there.
Identify the customers, products and jobs that produce real margin and reliable cash. Defend those first. and progressively eliminate those that do not contribute. When you have done the first round, do it again, you will always find more that can be productively removed. You are in effect, stress testing the revenue and cost generation base of the business.
This exercise intimidates many SME’s, who tend to form emotional ties to products, customers, and distribution channels. In tough times, emotion must be set aside.
Renegotiate early.
Banks, landlords and suppliers all hate surprises. They will listen more carefully and be more accommodating when they are a part of the process of ensuring bills will be paid, even if a bit late.
Secure facilities early. Reset terms where needed. Ask for flexibility while you still look like a good risk.
Keep hustling for sales
A weak market is not a good excuse for sloppy selling.
Tighten follow-up. Improve conversion rates. Shorten the path from enquiry to proposal to close. Make it painfully easy for the right customer to buy.
Stay visible
Marketing investments are often the first savings made in any downturn. Resist the temptation, as history clearly demonstrates that those that keep investing during the tough times come out way stronger when the worm turns. Besides, when others pull their marketing, you become more visible for no extra cost.
Be aware of bargains.
Downturns create bargains. Competitors stumble. Good staff become available. Assets get cheaper. Market share can move. Cash lets you act while others freeze.
Lift your prices.
This is sure to give some the ‘wobbles’ and is always difficult, but if you have done all the above, you will be delivering real value to customers. An extra dollar added to the revenue line drops straight through the P&L onto the profit line. There is no quicker way to increase financial resilience than to lift prices while holding volume. Even if you drop a bit of volume, do the maths, and 9 times in 10 you will be better off after the price rise.
Header credit: Scott Adams and Dilbert
