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Preparing for Challenging Times: Small and Medium Enterprises Brace Themselves

The latest bi-annual MYOB Business Monitor reveals that a significant majority (52 percent) of Australian SMEs anticipate an impending recession within the next 12 months, while 57 percent believe the economy will decline in the coming year.

A recession is technically defined as two consecutive quarters of negative growth in real gross domestic product.

While it is best to leave the debate about Australia’s economic prospects to the experts, here are some proactive measures you can take to safeguard your business from any potential fallout.

  1. Emphasize the Importance of Cash

The timing of cash inflows and outflows can determine the fate of your business. During challenging times, revenue may dwindle, and liquidity may become scarce. Balancing your budget may feel like walking a tightrope.

To navigate these circumstances, closely monitor your daily cash flow and create quarterly and half-yearly cash flow forecasts. These tools will help you anticipate periods of reduced cash and enable you to develop strategies to overcome them.

If you’re fortunate enough to have excess cash in your business, ensure that it is either generating interest or serving as a buffer for higher costs or interest rates.

Additionally, having cash on hand may present opportunities to acquire discounted assets or struggling competitors. The annual KordaMentha & TMA Australia Turnaround Survey, released in November, indicated that a majority of respondents expect an increase in M&A transactions involving distressed assets in the coming year.

  1. Ensure a Steady Cash Flow

As the economy tightens, some customers may delay payments or face difficulties in managing their finances. It becomes crucial for you to avoid bad debts.

Alarming data from the January 2023 CreditorWatch Business Risk Index reveals a 39 percent year-on-year increase in payment defaults.

To minimize bad debts, consider conducting credit checks on new customers, dedicate more time to chasing overdue invoices, or enlist the help of debt collectors.

Explore options like offering early payment discounts to customers. Can you shorten payment terms or negotiate better terms with your suppliers? Is it possible to unlock additional working capital through invoice or asset finance?

  1. Monitor Profit Margins

According to ScotPac’s recent SME Growth Index Report, three out of four SMEs reported a 15 percent average increase in costs in the six months leading up to September 2022, attributed to inflation and other input cost rises.

In response, nearly two-thirds raised their prices by an average of 14.5 percent, while one in three absorbed the higher costs. Interestingly, five percent chose to lower prices to differentiate themselves from competitors.

As the report suggests, it is essential to critically evaluate your operations and identify areas where costs can be reduced and efficiency enhanced. Consider leveraging innovative technology to achieve these goals.

Explore options such as finding more affordable suppliers, renegotiating contracts, reducing workforce size, or experimenting with different marketing strategies.

Observe how your competitors are managing the downturn. For instance, if input costs rise, can you absorb the increase in your margin or raise prices more conservatively than your competitors? If competitors have scaled back their marketing efforts, is this an opportunity for you to intensify your marketing activities and stand out from the competition?

Furthermore, ask yourself what other unique approaches you can adopt. While this will vary from business to business, it could involve streamlining product lines or services or introducing a more cost-effective or novel version of your product. Embracing innovation may yield benefits during challenging times.

  1. Evaluate Your Debt

If your business carries debt, it is crucial to understand the interest rates associated with it and prioritize repayment of the highest interest obligations. Is it possible to improve your financial position by restructuring your debt or accessing a line of credit? Should you explore alternative working capital solutions?

Original article republished with permission:

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