Wednesday, February 28, 2024

How Australian businesses can prepare for recession

With the global economy in a state of flux, Australia’s businesses are not immune to its effects. As we traverse through this ongoing pandemic, many companies have begun readying themselves for an impending recession. While it is impossible to know when or how extreme a recession can be, there are steps that business owners can take now in order to prepare their enterprise for leaner times ahead.

Before we delve into several recommendations a business can make during a recession, let’s have a look at the current economic predictions of 2023. There have been many economic and geopolitical events which majorly disrupted business, which is why being aware of the year’s prediction can assist in your preparation.

What does research indicate about 2023’s economic outlook

Most businesses are operating in the fear of a recession. During these tenuous economic times, any additional undesirable development like a sudden spike in inflation, dramatic rises in interest rates or other global events such as a resurgence in Covid-19 can cause the global economy to experience a recession.

According to the World Bank Organisation, this year the global economy will grow by 1.7% and 2.7% in the following year – this is markedly a slow growth. While global economy growth will be behind what it should be due to the pandemic, not all predictions are gloomy.

The original factors which drove recession in the past two years have already started to revert, says research from Deloitte. Pandemic induced difficulties such as heavy supply chain congestion, expensive raw materials from geopolitical conflicts and policy changes are slowly retracting. All of this does indicate that inflation will begin to turtle its head and supply chains overtime should stabilise – especially once China gains greater control over their Covid-19 situation.

There is good news for businesses, however the path to reaching this positive stage requires some downfall first. According to JP Morgan’s global research, there is a likelihood of central banks cutting interest rates which should recover asset prices and the economy. The downside is to achieve this we will experience increased unemployment levels, economic instability and market volatility.

With all this in mind, here are a few factors which can assist business in Australia prepare for a potential recession.

Methods for businesses to prepare for a recession

The first and most obvious form of preparation businesses can do for a recession is to focus on their cash flow. 

A recession can lead to a decline in sales because consumers will spend less and become stricter on their money, which makes it difficult for businesses to maintain a positive cash flow. Becoming aware of your operational expenses and identifying areas where costs can be reduced is something businesses should identify to safeguard their cash flow in case of a recession. Recognising gaps in in your logistics structure which eat into time or creating connections with cheaper supply chain providers are also paths which should be explored, as they all ultimately link to cash flow.

Diversifying revenue streams
 
As mentioned earlier, during a recession it’s common for businesses to experience a decline in sales but cash flow can still be salvaged by having multiple streams of revenue to safeguard their stability. By having multiple sources of income, businesses can reduce their dependence on a single market or product, making them less vulnerable to economic conditions.
 
Revenue diversification can be accomplished through new products or service. To further expand profitability and reach into untapped potential, consider branching out to new markets. This could mean launching in a different country, region or targeting a fresh customer demographic. For instance, an e-commerce business that predominantly serves Australian clients may want to contemplate extending their reach into New Zealand and the US.
 
This method can be further amplified through the exploration of different distribution channels. Whether that’s done through new online marketplaces or partnering with other businesses, this is something which should be considered regardless of a recession.
 
Reducing Overheads
 
If a recession were to occur, some businesses may need to make a few difficult decisions. Closing off non-profitable branches or locations, reducing operational costs for business functions such as marketing, or even letting go of some staff – these are all choices some businesses will need to make amidst a recession.
 
However, there are alternatives available which can enable businesses to reduce their overheads without sacrificing business functionality. A virtual office is an ideal example of such alternative, which allows businesses to reduce overheads and ensures their business remains credible.
 
Create stronger connections with your customers
 
During a recession every business will want to make their current customers as happy as possible. The likelihood of attracting new consumers becomes skewed amidst a recession, which is why maintaining clear communication with customers will be beneficial.

Ensure clear and direct communication with customers – if your business is experiencing difficulties or delays are occurring, be sure to use all of your communication channels to inform them before the issue escalates.

This will create stronger brand loyalty and stable revenue which is invaluable during a recession.

Manage your debt and avoid new debt

Businesses with a high level of debt are the most vulnerable when the economy is plunged into a recession – with many large companies seeking bankruptcy protection. Typically, interest rates rise in a recession and businesses which have a variable interest rate on their debt will see their costs go up.

A common strategy businesses employ to tackle this is by making aggressive payments towards your debt. While this may not be possible for all businesses, ideally you will want to reduce the number you owe the bank as much as possible and as soon as possible.

Taking a new loan during a recession to help counteract low sales should be avoided. If you are anticipating a recession then take a loan with a fixed interest rate before the recession to mitigate increased repayment.

However, if you’re left with no option and apply for a loan during the recession, then ensure to get a variable interest rate.

The overview

Overall, while a recession may hit Australia sometime soon it’s not all negative news. Businesses can undoubtedly survive if they plan ahead and explore strategies to optimise their cash flow, whilst exploring cost saving alternatives such as a virtual office.

Original factors that were driving increased prices such as congested supply chains and expensive raw materials are beginning to stabilise – normal economic conditions will return soon.

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Arsen Armstrong

Arsen Armstrong

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