With South Africa officially entering a technical recession in the fourth quarter of 2019, it’s tough out there for small and medium businesses.
By Viresh Harduth, vice-president: small business at Sage Africa & Middle East
Add a weak exchange rate, the prospect of Moody’s downgrading our sovereign credit rating to junk, forecasts of more load shedding, and a coronavirus wreaking havoc with the world economy. It’s clearly not going to get easier any time soon.
But as the cliché goes, when the going gets tough, the tough get going. And South Africa’s small and medium businesses are as tough and resilient as you can get. Many of them will emerge from this difficult period stronger than ever. The good news is that there are several steps you can take to ensure your business survives and even grows when economic conditions are poor.
Manage cash-flow even more tightly
The key to surviving a recession is to watch your cash flow like a hawk. Run regular cash flow forecasts to estimate how much money your business has coming in and going out. This will help you cut the cloth according to the resources you’ll have at hand. A good accounting solution will help you to forecast cash flow based on when invoices are due to be paid, credit notes are due to be refunded and any recurring income or expenses.
Avoid selling on credit, especially if you’ll be on the hook for VAT or payments to your suppliers before the customer settles your bill. If you’re in an industry where you can’t avoid giving credit – for example, supplying legal services to a corporate – become more assertive about collecting payments by the due date.
Cut the frills
If you’re anticipating or experiencing a drop in revenue, cost-cutting can be an effective way to maintain profitability. You could, for example, look at running a more virtual business if you’re in a space like marketing. Rather than spending money on rental and petrol, you can shepherd your team and clients towards using online tools to collaborate.
It’s also wise to review the day-to-day running expenses. When last did you switch insurance providers and are you sure you’re getting a good deal? Can you still afford the Friday morning ritual of cappuccinos and croissants for the team? Do you buy stationery and consumables you don’t really need?
Unless you are genuinely overstaffed, downsizing your headcount should be a step of last resort. This is because laying off people can have a negative impact on morale and customer service, plus, you’ll need to pay retrenchment packages. You’ll also face recruitment and training costs in future when you start growing again and need to hire.
Pivot to a recession-proof sector
If your bread-and-butter business is under pressure, you can look at ways that you can use your skills and infrastructure to target more recession-proof markets. For example, if you’re running a supermarket, evaluate getting into the bulk discounted food game. A car dealer can step up focus on repairs and secondhand sales rather than pushing new cars. And if you’re in interior design, an interesting opportunity may beckon in home staging – making houses look their best to facilitate sales during a difficult market.
Focus on customer service
During a downturn, your customers are also feeling the pressure. They’ll turn every cent over twice before they spend it. The key to surviving the recession is to retain as many of your good customers as you can. Figure out what is important to them and keep delivering the quality of service that they expect.
As you cut costs, try to do so in a way that doesn’t damage the customer experience. If you do face a trade-off between maintaining your standards and meeting customer’s price expectations, communicate openly about the decisions you are making and how they will affect the customer.
For example, if you’re expecting the rand/dollar exchange rate to affect the costs of the hair treatment products you use in your hair salon to rise, let customers know you’re increasing your prices or switching to a cheaper alternative. If possible, offer them a choice or find out which option works best for most of them.
Get smart and tactical about sales and marketing
Too many small businesses make the mistake of ending all marketing efforts when a recession hits. But the short-term cost-saving comes at the cost of building a strong pipeline of leads and sales for the future. Plus, maintaining sales and marketing efforts throughout a downturn can help you to grow market share as other companies in your space reduce their spending.
Rather than abandoning all marketing efforts, review your spending to see where you are getting the best return on investment. You might find that it pays off to focus on low-cost digital channels such as search and social rather than print or radio. Tactical executions such as sales, price promotions and discounts can help drive sales in a tough market.
Starting a business in a recession
If you are thinking about starting a business, you don’t necessarily need to change your plans because of a pothole in the economy. There are some businesses that do well in nearly any economy and that can thrive in a recession:
- Accounting services
- Debt counselling
- Financial advice
- Training and education
- Repairs and maintenance
- Discount retail
For some inspiration, remember that the likes of General Electric, Microsoft, Burger King and many more were founded in difficult economic periods. Starting a business in a recession is a baptism of fire, but you’ll run lean, develop good habits and put yourself in a strong position to grow when the economy recovers.