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How to recession proof your business

By 30 August 2020May 20th, 2021No Comments

How to recession-proof your business

Are you prepared for what could come next?

7 Things to know…plus practical steps to take right now.

Even in the Great Depression, money was still changing hands.  Less. But people were still paying their rent, buying food, getting repairs done and more.

My point is trades will always be needed.  Yes, Coronavirus has sparked a chain reaction of events that is completely changing its landscape of how we all do business.  No one knows how this will play out, or how big the hole will be.  This will affect every single business in NZ including yours and sadly some will not survive.  As we navigate the rest of the year, having a cash buffer is more important than ever.  After lockdown, some work that was previously solid is now uncertain.  We are not economists, but here are 7 things you should know, and be working into your plan now, while you still have time.

  1. Downturns weed out the crop

Do not waste a good recession.  Sure, it is harder to get to work when times are slow, however everyone is in the same boat.  Your competitors who are doing a poor job pricing too cheap, taking the quick buck, and burning their reputation…many of them will disappear.  Ultimately leaving more room for you.  The top tradies always have work in any industry, the best are always in demand, regardless of what the market is doing.  It is a chance for you to get better, more efficient become leaner for the next phase.  When things bounce back, you will be ready to dominate, and have less competition.

  1. Those who are slow to react are the worst hit

Listen up because this one is important:  You MUST be proactive with decision-making. Watch the numbers closely.  Look for the early signs so you are not surprised.  Do not rely on backlogs of work that may dry up or disappear.  Make sure you are doing all you can to keep the work flowing in.  If your efforts are not reflecting and you need to cut overheads and possibly staff, as painful as it is do it early.  Not after you haemorrhage a heap of cash first.  Identify options ahead of time.  Haver a plan B for all scenarios, such as an overdraft facility or a cash buffer in the bank.

  1. Some of your customers will go broke

Have you ever been stung by a large bad debt? Most tradies have.  That is in the good times.  It is even more likely to happen in a downturn.  Often tradies rely too much on one or two big clients.  It is risky.  As a rule of thumb, your biggest client ideally would not be more than 30-40% of your business.  Assess now: -If your biggest client disappeared, would you still be OK?  We have all seen bigger companies fold and little guys get hurt.  Do not let it happen to you, make sure you are not carrying late payers and have solid terms of trade.

  1. Never stop marketing

Why should you market if you have more work than you can handle? That is now.  In a downturn, things can change quickly.  Assess: is your work coming from just one source currently? It is not a good idea to rely on only one stream to feed your jobs through.  What if your biggest customer had their work dry up? Or went broke and you had to deal with the receiver who did not pay you? What if they changed owners? Or their project manager (who dishes out their work) decided he was going to use your competition instead? This can happen and does.  Especially if word of mouth is the only way you get leads, build a larger number of sources.  There are so many different and effective ways for tradies to market their services.  Then even if some dry up, you will still have other streams of work.  In slow times, you can also diversify into other types of jobs you can make money on.  Do both! Spread your risk.

  1. Cut the fat

This is something you should be doing at least once a year anyway.  Cash is king, and you want as much of it available as you can.  Reduce overheads.  Work on becoming more efficient.  Reduce debt as much as possible.  In a recession, banks tighten up lending and overdrafts.  Be aware of interest rate trends and your ability to pay back current debt.

  1. Under-pricing lead to problems later

On some jobs, to keep the work, you might have to sharpen your pencil. Be careful. Careful.  Do not make the mistake of assuming, if you have steady work, all will be ok.  You must know at exactly what point the job is not worth doing.  In hard times, lots of tradies will do anything to get (or keep) the work.  They are the ones that get into trouble first.  Know your margins.  Quote too cheap and you will feel it down the line with tight cashflow and higher debt.  That is not sustainable.  There are better ways o win work and keep your margins strong, even when you are quiet, even when your competitors are under-cutting you.

  1. What if your suppliers or bank went broke?

Those who do not study history are doomed to repeat it.  The 1992, Westpac got into serious trouble and almost went under.  In the global financial crisis in 2008, the 4th largest US bank, Lehman Brothers, went bankrupt.  So yeah, these things can happen.

I do not know which banks are safer than others these days, but they are often connected.  If American banks end up in trouble, again the chain reaction to the banks down under is likely.

Spread the risk.  One bank for your home loan and another for your business.

Same with suppliers.  Having more than one who knows you (and who you buy from regularly) is a smart move.  Suppliers will be cautious of new accounts as things get tight.  Get in touch with your suppliers and ask for longer payment terms.  Watch their pricing – if it goes up make sure you catch this and pass it along to clients.  As we know, many suppliers now run on “just in time” ordering and do not carry much stock.  Figure out how any supply shortages affect you, so you do not get caught short for upcoming jobs.

Let sum up:

We cannot stop a recession.  We can prepare wisely.

Carving out time for strategic thinking is key because when the economy changes, your approach must also change.  Remember, in a recession there are always opportunities, but most people are too busy scrambling or freaking out to see them.  Build stronger connections with your network, your staff and your customers, suppliers, and bank.  You will need them.

It will be a hard road and you will not have all the answers – none of us do.  So, make sure you also have a good financial advisor to talk to regularly, and work through any issues.