Gearing Up Business Performance In A Downturn

It's vital as a business owner to ensure your business is well positioned for any economic change, ensuring it survives and can take advantage of potential opportunities as they arise.

The changes during a downturn can include significant movements in interest rates, inflation, stock market prices, consumer spending and real estate prices amongst many others. To keep on top of these, some of the key areas for you to focus on in your business are as follows:

Pricing - The natural reaction when sales fall is to decrease prices to retain sales volumes and growth. In a downturn, your business may be better off selling less stock at sustained prices, avoiding shrinking margins and sales that are now unprofitable. Sustained and noticeable price reductions can cause long-term damage to your brand and price positioning. Avoiding such reductions can also prevent possible price wars with struggling competitors.
Major investments - If you're contemplating a new store or the purchase of a large piece of equipment, consider the impact a downturn may have on this investment. Given the large cost, profits will need to be generated for many years to recover the initial investment, and this may be harder, or at least take longer, during a downturn.
Stock - During a boom, sales of luxury products skyrocket. During a downturn the reverse is true, so it may pay to order less of your "top of the range" products and instead order more budget items to appeal to consumers who will have become more price sensitive and budget constrained.

When ordering stock, it is also important not to order repeat volumes without considering that sales may slow in the future and existing stock will take longer to sell, providing a larger buffer against running out of stock. This may also be an opportunity to review normal stock levels, as they can potentially be reduced, lowering the working capital needs in your business.
Marketing - A downturn invariably means there are less new potential customers in the marketplace. Less new customers acquired for the amount spent on advertising mean that the return you'll receive on this spending is reduced. Instead, it may be better to focus on customer retention strategies. For your remaining advertising, it's an opportune time to seek better rates to ensure you're getting sufficient return on the remaining dollars spent.
Get paid - As sales decrease, many businesses find it harder to collect outstanding accounts, potentially causing your accounts receivable to increase dramatically. When viewed in comparison to falling sales level, this proportional increase is even more noticeable. It's important to keep track of accounts and make sure overdue accounts are being suitably followed up.
Borrowing and interest - In a downturn it can be tempting to increase borrowings to cover expenses. This increases interest costs, which can be compounded by potential rises in interest rates. An alternative is to keep a vigilant eye on costs and make sure your business remains cashflow positive when compared to the reduced level of income being received.
Staffing - One of the first signals of a downturn is cost cutting through a reduction in bonuses and promotions, and potentially the commencement of lay-offs. As a business owner you may reluctantly accept these lay-offs, but it may be necessary for the survival of your business. Staff will need clear, consistent and honest explanations of this rationale if you are to avoid unnecessary drops in morale, productivity and retention.
Diversification - To protect your business from a downturn, one of the easiest strategies is to produce or sell a wide range of products and market them to a broad range of customer groups. This means that a downturn in any one consumer segment won't significantly affect your business.

If your business finds itself caught in a downturn, it may be an opportunity to explore new products and markets that are less affected than your present selection.
Resource allocation - When life is "business as usual" it's easy to overlook lower performing aspects of a business, but during a downturn it's an opportunity to make strategic changes in this resource allocation. Consideration should be given to the closure of unprofitable stores, restructuring your company and divestment of products or business units where necessary.

The easiest way to avoid unnecessary impacts from a downturn is to plan and then act early when you see the signs. With forethought and strategy, your business could actually benefit from the change.

Matthew Nolan, Managing Director of Provident Inventory Finance has over 17-years experience in banking and finance, specialising in providing finance to SMEs. For more information on financing your business growth visit http://www.inventoryfinance.com.au/ or call 1800 763 012.
First published: 23 May 2008.
Last updated: 23 May 2008.