Friday, October 3, 2008

Managing Your Business during an Economic Downturn - Part 1

General
Things are not looking rosy in the S.A. economy and a downturn can be a business manger's worst nightmare. The formula for today's success can turn into nothing less than poison in circumstances where the business environment changes.

Managers often adopt short term solutions during difficult economic times in an attempt to stave off difficulties without looking at the long term consequences. It is important to remember that economic downturns are cyclical and are inevitably followed by an upswing.

Symptoms
Businesses usually regard a stagnation or shrinkage of turnovers or operating margins over a series of quarters as a sign of a downturn. Other signs to look for are cash flow problems and spiralling costs.

Consequences
  • Cash management problems
  • Decreased profits
  • Increase in amounts owed by debtors
  • Increased debts and interest costs
  • Increased costs
  • Loss of employee morale due to layoffs
Downturns are not necessarily always bad news as changing conditions can open up opportunities for resourceful businesses to outmanoeuvre larger competitors which tend to carry on business as usual or are unable to adapt quickly. Such innovative small businesses can:
  • Gain market share by taking it away from competitors unable to adjust to shifting market conditions
  • Become a leaner, more cost-effective and more efficient operation, better positioned to do well when the economy improves.
A common mistake is to view the downturn as a short term event leading to operational adjustments being made rather than making strategic changes. Some managers acquire a feeling of complacency during boom times and cannot see beyond the immediate operational requirements.

They should instead take time out to consider factors such as inflation and interest rates and prepare a plan to see the business through the tough times ahead.

Recommendations
  • Monitor cash flow very carefully and prepare cash-flow forecasts – try to avoid any nasty future surprises. . Negotiate with suppliers,landlords and service providers for better prices and take advantage of supplier discounts for prompt payments.
  • Talk to your creditors before any amounts become overdue for payment and ask them to extend the terms of payment. This will increase your chances of getting co-operation from credit manager.
  • Keep a careful eye on your debtors and reassess their credit worthiness. This applies to all debtors, even your old and trusted ones. If debtors ask for terms then use the opportunity to obtain security in the form of suretyships, bank letters of guarantee and mortgage bonds. By keeping close to your customers you may find new opportunities and be able to head off eager competitors.
  • Identify “nice to have” from “have to have”and get rid of unnecessary expenditure.
  • Flexibility is essential – consider broadening your business's services or product range to help to smooth out the bumps ahead.

CONSULT YOUR ASSOCIATION.
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