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Are recessions always bad for business?

Depending who you ask, we could be headed for a recession, writes Nigel Bowen. But what does that mean and will it be bad for your business?

Are recessions always bad for business?
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If you’ve done the grocery shopping lately, you’ll know inflation is becoming a serious issue.

When the inflation genie gets out of the bottle, economies can enter a destructive spiral. Prices rise, workers demand wage rises to compensate for higher prices, businesses grant wage rises then increase prices to cover increased labour costs, and the cycle continues. Until the relevant central bank starts jacking up interest rates.

The last real recession Australia experienced in the early 1990s was preceded by 17 percent interest rates, saw the unemployment rate rise into double digits and caused banks, building societies and credit unions to collapse. Even New Zealand’s relatively short and mild 2008-2009 recession saw unemployment double and led to a number of finance companies collapsing.

Schrödinger’s recession

The good news is, firstly, neither Australia nor New Zealand seems to be headed for a particularly severe downturn and, secondly, even serious downturns aren’t necessarily bad news for well-managed businesses.

A panel of reputable economists recently estimated there was only a 20 percent probability that the Reserve Bank of Australia would raise interest rates high enough to cause a recession.

Neither the bosses nor the workers in most developed nations are acting like a downturn is imminent. Most businesses are desperately trying to hire workers rather than making them redundant. For their part, workers have been embracing the Great Resignation, demanding flexible work arrangements and appearing to engage in the kind of widespread industrial action that hasn’t been seen since the 1970s.

Inflation hasn’t been as transient as some predicted. However, there’s a convincing case to be made that it is close to peaking, meaning central banks shouldn’t have to raise interest rates to the point where lots of borrowers start defaulting on their mortgages and business loans.

The dawn of a new era

Saying Australia and New Zealand’s ‘miracle economies’ will probably avoid a severe downturn isn’t the same thing as saying there’s nothing to worry about.

The post-GFC era, which was characterised by low inflation (leaving aside some major asset price bubbles), unprecedentedly low interest rates, and low wage growth, is ending.

At least for the short term, borrowing money will be more difficult and expensive. This will impact everyone from aspiring career-changers who want a loan so they can quit their job and buy a franchise business, to ambitious types in need of capital to grow their small business, to mid-sized businesses that need funding to expand overseas.

Tough times favour sturdy businesses

A rising tide lifts all boats and most businesses do better in times of boom than in times of gloom. (Some businesses – medical clinics, shoe repair shops, debt collection agencies, discount retailers – are either unimpacted by downturns or benefit from them.)

When economies are running hot, they can accommodate weak businesses. Imagine a tourist town with 10 restaurants. Six of those restaurants are run by restaurateurs who know what they are doing. Four are substandard, but attract enough undiscerning tourists to stay afloat.

One day, interest rates rise. Fewer people visit the tourist town and those that do are more careful about spending their money. When they decide to eat out, they first ask hotel staff where they should go.

End result?

The six good restaurants continue to do reasonably well while the other four hit the wall. At this juncture, the six surviving restaurants get to divvy up all the tourists who would have previously gone to the dodgy eateries. In this survival-of-the-fittest scenario, the surviving restaurants may even make more money than they did when the economy was pumping and many more tourists were visiting the town.

The tourist town is a microcosm of what happens when conditions become more challenging. Well-managed businesses offering good-value products or services continue to attract customers while their weaker competitors meet a Darwinian fate.

 

Prediction: Smart money’s on a slowdown

Economies, especially those of Australia and New Zealand, have long behaved in unexpected ways. So, business owners would be wise to take both economic forecasts and advice from so-called business gurus with a grain of salt.

That noted, it’s worth keeping the following in mind.

When interest rates rise, those repaying a loan typically react by cutting back on discretionary spending. If businesses start reducing headcount, even those who don’t have loans start saving more money in case they get made redundant. Consumers ‘tighten their belts’, meaning they get their hair cut less often, cancel streaming services, postpone the overseas trip they had planned and so on.

With Australian and New Zealand workers having every reason to feel confident about keeping their current job or getting a better-paying one, they haven’t yet significantly cut back their spending. However, if interest rates rise further, businesses reliant on discretionary spending – car yards, interior design businesses, luxury retailers, travel agents – may suffer falls in revenue.

Once businesses dependent on discretionary spending take a hit, lots of other businesses do too. The struggling pub doesn’t order as much beer from big brewing companies and no longer gets the local butcher to supply a meat tray for a Friday night raffle.

Survive now, thrive later

Many of the world’s great companies were started in the middle of an economic downturn. Around the turn of the Millennium the US economy started slowing and what were then called ‘Internet businesses’ were affected so badly that the term ‘dot.com crash’ was coined. Many much-hyped and well-capitalised tech companies hit the wall.

But you may have heard of some of the well-managed ones that weathered the storm and went on to expand exponentially: Amazon (an online bookseller launched in 1995), eBay (an online marketplace also launched in 1995), Netflix (a DVD-rental business launched in 1997) and Google (founded in 1998).

Any business that survives long enough will encounter unfavourable conditions at some point. Weathering economic turbulence may involve rethinking your business plan and necessitate making some painful decisions. But a business that can survive the hard times is usually well placed to thrive during the good ones.

Business preparedness tips: Cashflow & contingencies

There’s nothing any individual business owner can do about wider economic forces. But they always have the option of making the best of the hand they’ve been dealt.

Sensible business owners should consider the following points of order:

Take (further) advantage of cost-reducing, efficiency-promoting technology

The ‘I’ve already got an accounting/office suite/CRM SaaS, so I’m sorted’ mindset might get you by when the cash register is ringing and business loan repayments are modest, but quickly becomes a barrier to competitive advantage when the going gets tough.

When conditions are challenging, you need to investigate whether your SaaS providers have recently added more tools that will allow you to make business processes more efficient, your staff more productive and your tech stack more integrated.

Go the extra mile for customers

Loyal customers are more likely to keep buying what you’re selling through thick and thin, so this should be a primary concern when headed towards leaner times.

Something as simple as reaching out to check in with customers that may have specific challenges right now, or simply to say “Hi!” could make all the difference and show that you really care.

Pivot or diversify

During the lockdowns, even upmarket restaurants that had never previously done takeaway started doing takeaway.

Chances are you can also tweak your business’s offering to make it more relevant to consumers who may soon be more tight-fisted.

As MYOB’s own General Manager of Enterprise, Kim Clarke recently wrote for Kochie’s Business Builders, “building in a level of adaptability and a change muscle into your culture — as a mindset and a business capability — is the hallmark of a resilience business that is primed for growth”.

Focus obsessively on finances

Business owners should always do this, but it’s tempting to get complacent when times are easy.

When conditions are challenging, it’s crucial to be across every dollar coming into and going out of your business. And to keep a lid on costs while working hard to growing existing revenue streams and create new ones.

Shared from MYOB

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