Surviving an economic downturn
Implementing strategies in preparation for an economic downturn or recession shield your business during tough times and prepare you to take advantage of opportunities as they arise. Importantly, recession proof companies are prepared before the economic slowdown occurs – they do not wait until it is too late. All businesses are different, it is important to implement strategies best suited to your business.
This series addresses various mitigation strategies that could be employed to shield your business during tough times. This mini series will focus on areas to assist with survival through topics addressing the following:
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Review your strategic plan or business plan. If you don’t have one, get one quickly
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Build cash profits or arrange strategic funding
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Increase the hurdle rate on your investment decision (without stopping investments)
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Improve operating profitability
Recession Proof Your Business
This series addresses various recession proofing strategies that can be implemented by your Chief Financial Officer or part-time CFO including:
Implementing strategies around these elements shield your business during tough times and prepare you to take advantage of opportunities as they arise. Importantly, recession proof companies are prepared before the economic slowdown occurs – they do not wait until it is too late. All businesses are different, it is important to implement strategies best suited to your business. Your CFO or part-time CFO should lead, identifying and implementing the strategies most suited to your business.
Now is the time to act.
Part 1 – Focus on Profit Now.
Economic Indicator: Inverted bond yields have preceded the last three global recessions in 1982, 1991 and 2009. Twice in 2019, the most recent in August 2019, the bond yield was again inverted. While this does not mean a recession is necessarily around the corner, it should give boards and executives a reason to pause and reflect on how this increasing macroeconomic risk of economic slowdown or at worst, recession could impact on their business.
Part 2 – Cash and Strategic Funding.
Economic Indicator: The US–China Trade War is currently aiding the Australian economy as China stimulates domestic infrastructure to offset the reduced international investment (Trump orders US companies to 'start looking for alternatives' to China). China’s stimulus pushes up the price of Australian exported resources with governments through royalties and taxes and investors through dividends reaping the benefits.
The risk of recessions is from the continuing or deepening of delayed or discontinued investment in China. A slowdown in China’s economy would result in reduced Australian exports to China. Tourism and Education in particular. With three fifths of the Australian economy now consumption based, this would quickly flow through to reduced Australian domestic growth.
Part 3 – Risks and Mitigation Strategies
Economic Indicator:
Brexit creates substantial uncertainty to world growth and the risks of recession in 2020. In the short-term, the effects of Brexit will mainly be felt in the UK and the EU. Between April and June 2019, the UK GDP fell for the first time in six and a half years by 0.2%. A hard Brexit is anticipated to have a short-term impact on UK GDP by 3.5% and 0.5% impact on Europe. Trade agreements, visas and labour shortages, customs delays, finance markets, exchange rate impacts, the response by Ireland and Scotland all take time to work through with business investment being delayed until there is some certainty and confidence around where it might end and their return on investment.
For Australia, the direct impact is limited. Trade with the UK accounts for only 2.8% of Australia’s exports while trade with EU accounts for 4.6%. There are 1,500 Australian businesses that have an office in the UK, many of them use it as a base for Europe. Investment decisions need to be made by Australian companies on how they will operate within Europe and the people and customs implications of using the UK as a port of entry into Europe. Indirectly, the EU including the UK accounts for 15.6% of exports from China and 18.2% of exports from the USA. With already weak global growth and delayed business investment owing to the China-US Trade War, the effects of Brexit both directly and through our major trading partners could be the straw that breaks the camel’s back for Australia.
Part 4 – Acquisitions & Opportunities
Economic Indicator:
At September 2019, the Australian annual economic growth fell from 1.7 per cent to 1.4 per cent – the weakest rate since September 2009. As growth slows, businesses find it increasingly difficult to achieve their targets and become more reluctant to hire additional staff and as staff leave may delay replacing them to help maintain profitability. Consumers continue to pay off debt rather than spend exacerbating the problem.
Acquisitions and Opportunities.
Your competitors are not performing as well as you. With your strong profitability and healthy Balance Sheet, business lenders (who still need to lend to make profits themselves)
will be more than interested in lending money to you and because growth is sluggish, interest rates on debt will be attractive. An option available to you and few others is acquisitions. However more than 50% of acquisitions are considered a failure. So, what you look for and how you progress the opportunities is critical. Traditionally acquisition programs are the realm of large corporates. Smaller organisations simply didn’t have the sophistication. However the strategic and financial skills of your CFO or part-time CFO can also run an acquisition program that have the potential of evolving your business to the next level.
Part 5 – Increasing Unemployment and the impact on your business.
Economic Indicator:
Australia’s labour market was hit with unemployment up 0.1% to 5.3% and the underemployed increasing 0.2% to 8.5% in October 2019 as another worrying sign for the Australian Economy and the risk of an Australian Recession in 2020. For some businesses the impacts can be significant while for others they may have little impact. Specifically, those businesses that have greater exposure to discretionary spend will be already feeling the impact.
Discretionary spend are those items where households do not need to spend money such as: travel (especially overseas holidays), take-away foods and restaurants, alcohol and entertainment, house cleaner and other household services and luxury items generally.
Economically there is a rule of thumb that says for every 1% increase in unemployment there is a 2% decrease in GDP. Putting the above items together, every 0.1% increase in unemployment starts to have a much bigger impact on discretionary spend.
Should you want to develop a plan to recession proof your business, CFO Evolve’s, exceptional part-time CFOs could help you create it. We welcome you to contact us to ask us how.