Our expert panel has some advice on how to ride out the economic slowdown…
What measures should small business owners be putting in place as the South African economy starts to slow and we feel the effects of climbing interest rates and the weakening rand? Our expert panel has plenty of suggestions:
1. Go back to basics
The first thing to do is to ensure that your business is in a fit state, says author and small business guru Eric Parker. “When the times are good you can get away with excess and some untidiness, you can even hold on to extra stock because the economy carries you. But this all changes during an economic slowdown when you have to optimise your operation to ensure survival.” If you become negative during these times, you’re going to be pushed out, he warns. Instead, nimble entrepreneurs should view this as a time filled with opportunity. “Your competitors are also going to struggle, they may even go out of business, and you can view this as the time to assert yourself on the market.” There may be the opportunity for acquisitions. Find out which of your competitors are struggling and watch carefully to see the reasons for their plight, to prevent the same from happening in your operation. How do you do this? Don’t cut back on marketing and don’t start reducing staff without thinking carefully about the effects on your business. Instead retain a strong visibility in the marketplace and remember that the money spent on marketing is a longterm investment in your business. Don’t spend money aimlessly, ensure that you are reaching your target market in the best way possible. Motivated staff members are among your most valuable assets, so to start retrenching immediately is a mistake. Finding qualified candidates is extremely tough, and if you let people go now, you will only have to re-hire when the tide turns. “Your customers are also going to be experiencing tough times,” warns Parker. “Keep a constant eye on payments coming in; they’re going to want to pay you later and later,” he says. You may want to give incentives for early and upfront payments. Credit checks are also crucial to ensure that your customers aren’t stumbling during these tighter times. In business there are always cycles, good and bad times, and there are clear-cut strategies to help you weather and even prosper during an economic slowdown.
2. Sell! To the right people
Paying the bills at the end of the month is always going to be important and during tough economic times it’s crucial to start focusing on doing more business, fi nding new customers, speaking to old customers and chasing deals to ensure that there is cash coming in, advises Reana Roussouw of Next Generation Business Consultants. Remember the majority of your business comes from existing customers, and you should be looking to get more business from them. “Get back to basics offering good oldfashioned customer service, cold calling or door-to-door sales; anything that will bring in sales. All employees must understand that they are part of the sales effort, whether they are on reception or part of the fi nance team,” she says. Worry about growth and expansion later and start looking at ways to save money to prepare for the tough times ahead. Once the cash is in the bank, you can start planning for growth. Survival should be your primary concern.
3. Develop early warning systems
A lot of SMEs confuse sales with profi t, warns John Evans, director for reorganisation services at Deloitte. Good sales don’t necessarily translate into good profits. “In tough times, or when markets are declining, you need to be very certain that you understand your business cost base and forecast revenues going forward,” he says. Understanding cash flows and having a clear view of the level of sales you need to meet your costs, and the level of sales you need to achieve your ideal profit, is very important. The earlier the warning systems signal that profits are dipping, the better. In the case of a small manufacturer, for instance, it may take a month to produce something, another month to deliver and 60 days to collect the monies owed. “You’ve got a four-month cycle in this example and you would need to know early on if your sales are starting to decline, and you then need to slow down production. Otherwise you will end up with a lot of money tied up in stock, and this can be a critical error for small businesses,” warns Evans. Small business owners need to take a long, hard look at their operations during an economic slowdown, Evans adds. “If you’re going to survive, you need to be brutally honest with yourself, and as soon as you see that there’s a bit of a hiccup take action quickly.” This doesn’t mean simply cutting down on marketing, it means looking at your entire cost base and scaling back wherever is appropriate for your particular operation. “The biggest problem I see with people who are digging themselves into a hole, is that they don’t notice until it’s too late. Early warning systems are crucial.”
4. Keep score and then take action
Randal Godden, CEO of the Executive Caucus SA, a global networking and mentoring body for CEs, echoes this sentiment, saying that keeping score becomes crucial during tough economic times. Keep your eyes on monthly financials, as well as all key performance indicators that influence the goals you are trying to reach within the organisation. In the sales area, for example, you would look to monitor sales and gross profits by whatever category you deem necessary, it could be by product, major customer groupings or according to the performance of your reps. “The real key about keeping score is that it involves measurement of targets, monitoring on a regular basis to see where you are and regular action reviews to say what you are going to do about it,” explains Godden.
5. Cull your product range and customers
Keeping score will allow you to cull your product range and customers, advises Godden. “Small business owners often look to add new products, but they never look to see that they have a tail of products. This tail refers to the bottom 10% of products that represent only 1% or 2% of turnover and are really more costly than beneficial. In tough economic times this is something that must be reviewed very carefully.” You can do the same with your customer base by ranking them both in terms of turnover and gross profit contribution, and culling those that are at the bottom end, and probably cost more than they contribute. “It’s an exercise that’s done all too infrequently but it’s one that must be done in tough times rather than using our resources – people, trucks etc. – to service bottom-end customers that you don’t get any benefit from,” Godden says.
6. Generate new ideas
SMEs are agile because of the dynamic nature of their businesses, their low running costs, entrepreneurial passion and drive. And agile SMEs are generally in a good position to survive an economic downturn, says Ivan Epstein of Softline. Typically SMEs spread their business across a number of clients and those with an established client base may not feel the major impact of a slowdown. “My company, Softline – a start-up 20 years ago – has weathered many such storms. How did we do it? By staying focused, sticking to what we knew, staying passionate and driven, innovating and by always seeing the glass as half full because you can find opportunities for growth in the most surprising places,” he says. Innovation is always key to success, in storms and clear skies, and there are several ways to ensure innovation remains core to your business strategy. Epstein encourages small business owners to:
- Have a vision for the business and stick to it.
- Have a solid strategy within which innovation features predominantly.
- Create a culture that supports innovation.
- Be agile and change things if they don’t work.
- Employ and share with people who support the vision.
- Empower and trust the people you work with.
- Give advice, not permission.
- Remain focused and never lose your passion.
- Be innovative in everything you do, even if it’s how you manage your stationery purchasing.
- Listen to your customers; the market and your people.
Use slower economic times to go back to basics and ensure all elements of your business are in a fit state. Agile companies and those with adequate survival plans can look to steal a march on their competitors during this time and will benefit from a key competitive advantage. At the very least make sure that the foundations are sturdy and that you are poised for