With South Africa’s GDP growth forecast to be just 0.7% for 2019, most businesses are taking severe strain. To prevail in this difficult economic climate, each business will need to ensure that it is running an efficient operation.
Here are some ways that small and medium businesses (SMBs) can reposition themselves to succeed in a downturn economy.
■ Review your services and operations
To make your business more resilient, start with a review of the revenue and profitability of every product and service line you offer. The effect of an economic downturn can be counterintuitive, so always look carefully at the hard data. For example, you should look at how currency movements or rising electricity prices affect your margins to see whether an offering that did well in a healthier economy remains commercially viable.
Conversely, you might find that demand for certain products has risen against the backdrop of a weak economy because customers are seeking lower cost alternatives. You may find it better to more aggressively market the cheaper option to customers who can no longer afford the top of the line offering in your product range. In some cases, you can achieve significant cost savings by streamlining your product and service line.
■ Try to avoid cutting headcount…
Many managers will respond to tight economic conditions by reducing headcount. This is not surprising, given that the payroll is the largest or one of the largest costs for most businesses. However, apart from the human cost of retrenching people who will struggle to get new jobs, the economic logic of retrenching people isn’t always sound. Cutting headcount has a negative impact on morale, which can lead to poor productivity, a worse customer experience and attrition of top talent.
Restructuring costs (retrenchment packages, legal advice) can be high. Plus, the longer term expense of losing institutional memory can be significant. You may also find yourself spending more money recruiting and retraining people to replace those you retrenched when growth returns to the business. For these reasons, retrenchment should only be considered when all other options have been exhausted.
■ …cut costs instead
Before turning to payroll costs, look at the variable and discretionary costs in your business. Many companies can save significant amounts of money on travel by using Microsoft Teams or Webex for meetings rather than flying everyone to head office once a quarter. There is also often some low-hanging fruit in reducing spending on stationery and printing, downsizing your office premises or moving to a cheaper area, finding lower cost suppliers, or bartering for goods and services with other SMBs.
■ Identify customers who are still spending money
A highly focused sales and customer relationship management strategy can pay off in a downturn. Many businesses will find that the top 20% of their customers are responsible for 80% of their revenues and profits. It’s often the case that cross- and up-selling to these profitable and loyal customers is a more efficient use of sales and marketing resources than trying to get new customers.
Keeping your existing customers happy and securing more wallet share from them costs less than acquiring new customers. That said, there is a danger of becoming too reliant on a handful of big spenders, so keep an eye out for new customers with a similar profile to your most valuable clients.
■ Find ways to expand without growing your cost base
Your staff and infrastructure might be underused if your business is not growing as fast as you expected. That could give you an opportunity to expand into a new market without increasing your cost base, helping you diversify risk and remain sustainable in a difficult economy. You could target more recession-proof products or industries with these new offerings – for example, regulatory compliance spending in the business-to-business consulting sector rather than big-ticket customer experience transformation projects.
■ Automate to improve efficiencies
Many SMBs continue to run off paper documents, Excel spreadsheets and a bunch of other inefficient manual business processes. But there is so much great online software available for free or for a small monthly subscription that you can use to save time and become more efficient – accounting and payroll software to marketing automation tools.
Making use of technology can help you to use your own time and your employees’ time more wisely – so that people are doing billable work or selling to clients rather than spending hours each day on admin that adds no value to the business. Additionally, automation can help you to reduce human error in your processes, which also saves you time and money. Automated software can also help you to avoid paying a consultant to do certain work or needing to hire more people before you’re ready.