How Business Owners Can Prepare for Economic Weakness
January 2023
OBSTACLES PERSIST, BUT OPPORTUNITIES ARE STILL AVAILABLE…
With the Bank of Canada’s recent +25bps increase to its target rate, borrowers and lenders alike are becoming progressively more anxious heading into 2023 (not to mention the potential ‘R’ word). While doom and gloom may be the current sentiment of the market, business owners will have to consider ways to best position themselves for any potential economic storm. At DWA, we leverage our in-house expertise to identify the most susceptible areas that business owners should safe-guard against, and we wanted to share some of our insights in this month’s Debt Digest. Read on to find out more.
CONSIDERATION 1:
CASH IS KING
The old saying ‘cash is king’ continues to be worth it’s weight in gold. Businesses can, and have, survived economic hardships as a result of monitoring their cash flows. During 2023, consider:
Review monthly expenditures and identify opportunities to trim expenses without harming the business in the long term.
Reduce cash outflows: consider finding opportunities to negotiate better pricing terms with suppliers, negotiate lower rent with landlords, reduce overtime, and delay major purchases.
If possible, reduce the business’ debt obligations to increase liquidity without reducing your options to access external capital. Ensure that your business is prepared to go through a financing process and/or consider hiring a qualified professional to assist with the process.
Sell unused assets that are no longer required for business operations, both in the short and long term.
Secure long-term customer contracts (even at a slightly reduced price).
CONSIDERATION 2:
ADDRESS THE EMPLOYEE QUESTION
Labour markets have been historically tight, and the search for loyal and skilled talent has intensified since COVID-19. As a business owner, it is likely not a viable option to work 110 hours per work to fulfill these roles, so consider:
Analyze employee utilization and find opportunities to advance team members within the business.
Automating and/or streamlining certain business processes to maximize employee efficiency.
Outsourcing certain business functions to 3rd party firms.
Create a contingency plan to handle business stress by maintaining your family/friends, exercising, and taking some personal time. Recessions can last a while, and it is key to have YOU for long-term success.
CONSIDERATION 3:
BROADEN YOUR MARKET
Diversifying the business’ core market provides opportunities for long-term success during recessionary periods. During a recession, expansion opportunities are available but should be considered on a case-by-case basis. If you have not done so already, consider:
Looking at opportunities to grow past a single market segment, primary customer or geographic region, especially if a large portion of your income is from one or two customers.
If possible, add new product/service lines that complement the business’ primary operation.
Investigate new methods to manage key business processes, including inventory management.
Competitors may be decreasing their marketing expenses, so identify possibilities to become visible to new customers and clearly articulate your business’ value relative to competitors.
Explore opportunities to increase prices for new (or old) customers.
CONSIDERATION 4:
CONTINUE TO FOCUS ON SERVICE QUALITY
Developing long-term customer relationships takes a certain level of service, quality and trust – these relationships should be managed even more closely during a recessionary period. Consider:
Focus on maintaining current relationships and continue to proved excellent customer service.
Identify any ‘pain points’ your current customers may be experiencing and develop solutions to address them. By doing so, you may have found a new revenue stream.
Identify customers that may want to stock up on key supplies, and actively market to them.
Consider altering how you manage customer relationships (i.e. upgrading/providing web services, e-commerce, personal service).
CONSIDERATION 5:
KEEP AN EYE ON THE ECONOMY
There are several economic indicators that are indicative of a potential recession. As a business owner, you should maintain an understanding of these indicators as they may allow you to be proactive in your business’ response. Indicators include:
Gross domestic product (GDP) declining over two consecutive quarters.
Consumer confidence falling.
Unemployment rising.
Credit card and loan debt increasing.
Factories/manufactured products decreasing.
Government and financial media that discusses recessions.
Any indicators specific to the industry your business is in.
CONSIDERATION 6:
ASK FOR ASSISTANCE
Reach out to your trusted advisors (such as accountants, lawyers, bankers, financial advisors, and business mentors) for input when preparing a recessionary strategy. They can look over your plans and make recommendations based on individual experience and expertise. Lean on your network during tough times for ongoing advice, support and inspiration.
At DWA, we have been a trusted advisor to multiple clients that have faced tough times. We would welcome the opportunity to discuss your plans, options and strategies as we go through this uncertain time.
Sources: Statistics Canada, Xero, Diamond Willow Advisory.
