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A mid-tier accounting firm has urged accountants and small business owners to learn from the economic hardship facing businesses in Western Australia to prepare for a possible similar downturn.
The mining downturn in Western Australia has seen businesses suffer, with key lessons on how to maintain a business in tough times and position the business for new growth to be drawn from their experiences, according to RSM director of business Advisory Craig Ridley.
“The economy moves in cycles that aren’t always as extreme and obvious as boom and bust. Business owners need to keep an eye on what’s happening right now and plan for the future because nothing ever stays the same,” said Mr Ridley.
“For example, demand for products and services dropped dramatically in Western Australia during the mining downturn, with nothing to replace it. The same could happen if there’s a drop-off in construction activity in other states. Without demand, cash flow can dry up quickly, which makes it difficult to service loans on equipment, for example, that no longer earns revenue. At the same time, asset values can fall steeply.
“These types of events can put immense pressure on businesses, so it’s important to be ready for them and have a plan in place.”
According to Mr Ridley, accountants can help their small business clients stress-test cash flows and profit models for ‘what if’ scenarios, and take risk mitigation steps depending on risk tolerance.
Small businesses should also try their best to build cash or equity reserves to ensure the business’s long-term financial stability, to allow it to ride out any cycle more smoothly, while managing workforce capacity flexibly to control costs while maintaining operational capacity.
“Business success depends on careful planning. By putting safety measures in place ahead of any downturn, a business can improve its survival odds,” said Mr Riley.
“Failing to plan increases the likelihood of the business either failing or being acquired by a larger competitor during a downturn.”