2020 saw Australia enter a recession for the first time in almost 30 years. That’s not surprising, given the impact of COVID-19: lockdowns, business restrictions and international (and interstate) borders closing have all contributed to our economic slowdown.
In this article, we take a closer look at the challenges and opportunities this time presented, and how to prepare your business for uncertain economic times in the future – and potentially another recession.
There’s no doubt the impact of a recession on businesses is challenging, particularly after decades with no real downturns. It was a first-time experience for many business owners and business leaders. If you’re one of them, here’s some of what you may have experienced.
One of the most immediate challenges seen was reduced consumer spending. With job security at risk and restricted business activity, consumers across the country began to tighten their belts. And while spending cuts may have been beneficial to individual household budgets, they also had immediate impacts on business revenue, profitability and long-term viability.
With some sectors closing and others restricted, job losses were high, which in turn increased the risk of loan defaults. As banks faced losses within their lending portfolios, many revised their lending criteria and tightened restrictions, making business working capital harder to secure.
Late payments began to rise in some industries, and so did the risk of bad debt. Customers faced their own challenges with fluctuating demand and business restrictions. As a result, many had difficulty honouring their invoices.
While the future has never been certain, the post-COVID world is bringing a new meaning to the word ‘uncertainty’. Economists remain unsure about forecast figures, and businesses have found it difficult to make solid projections.
Overall, the uncertainty has made any kind of forward business planning difficult.
While there are obvious downsides to recessions, economic slowdowns can also present new opportunities. Uber, Slack and Airbnb are just some global brands that were founded during the GFC recession. They’re perfect examples of the potential to grow in uncertain times. Here are some of the avenues that may be worth exploring for your business.
Several industries experienced some of their busiest times ever in 2020 and thrived in response to COVID-19. Healthcare, manufacturing, eCommerce, food and beverage, IT, home delivery and cleaning are just a few of the industries enjoying rapid growth opportunities.
As competitors pull back on their spend or leave the industry altogether, you may find some unique opportunities to grow. You could consider picking up their client base or proposing a mutually beneficial merger and acquisition deal.
Improved supply chain
Now may be the perfect time to secure more favourable supply chain deals. As providers focus on securing their business, you might have the opportunity to negotiate better prices, terms or shipping arrangements.
Affordable property prices
Commercial property prices are expected to fall in 2021. With that fall comes an opportunity to secure the right property at an attractive price for your business. Consider turning rental payments into a cost of investment while adding another asset to your balance sheet.
Tackling challenges and seizing opportunities
Whether your business faced challenges in 2020, or you enjoyed an unanticipated growth opportunity, one thing is certain – your business needs to plan for the unpredictable times ahead. Businesses with solid finances in place can better handle whatever economic and market conditions come their way. They can ride through periods of uncertainty, capture opportunities and come out stronger in the end.
Research has shown that businesses who take fast action can better weather any downturns. Meanwhile, businesses who take longer to respond end up facing expensive recovery periods when the economy rebounds.
Here are two key strategies to help you take considered action and prepare your finances.
Review risk exposure and costs
Assessing risk exposure plays a big part in preparing your business for any future recession or period of economic uncertainty. Modelling different scenarios, evaluating their likelihood and quantifying their impact on your business are all key.
You can then look into how each one will impact your balance sheet, and identify where your business is most vulnerable. For example, what would be the impact of a percentage drop in sales or prices? What can you do to minimise that impact and prepare?
Protect and strengthen your financial position
Ensuring your business has enough cash flow and access to funding is the foundation of a strong financial position. To do this:
- Monitor and maximise your cash position – keep track of payments, delay spending and encourage cash payments from customers to help ensure healthy liquidity and maintain the flexibility to make smart investment decisions.
- Manage customer credit risk and optimise working capital – assess your customers’ credit risk rating and their likelihood of delaying or defaulting on payments.
You can also use flexible finance tools to help you manage this risk. For example, trade finance gives you a revolving line of credit to use when you need it for local and international procurement. Debtor finance can help you quickly access cash tied up in your receivables, while early payment discounts can encourage customers to pay on time.
Now is the time to plan
The recession of 2020 was undoubtedly a shock. But while recessions will always present a business threat, they can also offer significant opportunities. The first step to managing both, and not only surviving, but also growing in a recession, is to strengthen your cash flow and working capital position.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.