How SMEs can thrive rather than survive in a turbulent business environment
It's no secret that the business environment is more turbulent than ever. Markets are constantly shifting, labour force shortages are becoming more common, and Covid-19 is causing disruptions in supply chains. So how can small to medium businesses not just survive, but thrive in this environment?
We've put the question to Stellar's network of advisers and strategists to come up with the focus areas. First, a little background of what's making the post-pandemic environment challenging for many small- to medium-size businesses.
"This is your captain speaking..."
You know the announcement (even if it has been a while between flights): "We are currently experiencing some turbulence. I ask that you please remain seated with your seatbelts fastened ..." The same could be said about economic headwinds. Consider these indicators:
A squeeze on the workforce: The Reserve Bank of Australia (RBA) noted at its 5 April meeting that unemployment had declined to 4 per cent in February, its lowest rate in five decades, and "other measures of labour market spare capacity had declined to levels previously observed in 2008". In other words, there are plenty of jobs and not enough workers. Driving that is a number of complex factors.
First, the overall number of people in the workforce has declined. Primarily because historic levels of net migration are down, with two-plus years of border closures keeping overseas workers out of the country. Second, people are switching jobs. From reasons of overwork and dissatisfaction, think of nurses in aged care, to employers aggressively recruiting talent, labour force mobility is at record levels. More on this later.
Supply chain strain: The RBA notes that global supply chains had remained strained overall. Global shipping costs had increased further after stabilising earlier in the year, and semiconductor prices had also picked up again. All of which means certain products are more expensive, hard to get and have longer delivery times.
Inflation: In Australia, consumer price inflation is officially 3.5 per cent. The RBA's meeting minutes point to "indications that inflation may have picked up" in late 2020 and early 2021. This is being driven by higher energy and food prices, as well as increased costs for housing and child care. While the “underlying inflation” rate, where items with large price changes are excluded, is at 2.6% and withing the RBA’s target range of 2-3%, it is creeping up – cue talk of interest rate rises. For some industry sectors, inflationary pressure raises the cost of doing business, squeezing profit margins and making it difficult to invest in growth.
As a business owner, you need to be prepared for the ups and downs of the market. Here are the focus areas nominated by Stellar's experts that will help you minimise the impact of a turbulent business environment:
Get a tight rein on your finances
A business owner's primary focus should be on increasing revenue and profit, but it's also important to keep expenses under control. One area where many businesses fall short in managing their debt. While some debt is necessary to finance growth, too much debt can put a strain on cash flow and limit the ability to make investments in the business. High-interest payments can eat into profits.
Develop a debt management strategy that includes both short- and long-term goals for reducing debt. By getting rid of debt, businesses can free up cash flow, improve their financial statements, and focus on growing their business. Call in debts. If you're owed money by customers, it's important to take action to collect those debts. This can be a difficult task but reducing your exposure to customers who are likely riding out the same economic headwinds as you means that your accounts receivable are less likely to become bad debts, which choke cash flow and potentially cripple your business.
Create a financial buffer by setting aside a portion of profits each month to build up cash reserves. The size of the financial buffer will depend on the specific needs of the business and industry, but it should be large enough to cover between three and six months' worth of expenses. This will give businesses the resources they need to continue operating if revenues drop or unexpected expenses arise. An immediate impact of the workforce shortages mentioned earlier will be increasing wages and further competition to attract and retain talent. Your buffer needs to be able to absorb the increasing costs. The obvious caveat here is that looking for savings to build a buffer should not come at the cost of underinvesting in the business and leaving it without the resources to capitalise on improving trading conditions.
Build a strong team
Strong teams are loyal, motivated, and aligned with the business's goals. A good team will help you weather any storm, including the "great resignation", where reports indicate that more than 1 in 5 Australians has changed jobs within the last year, and almost 1 in 4 are considering leaving their current place of employment.
Build a positive and rewarding team culture. Do you even know your team culture? Culture is a strategic function that aligns people and practices. It keeps people engaged and motivated, and it delivers on promises to recognise and reward great work. Culture makes a compelling case for people and join and stay with a business. It is your pitch to a tight labour market. Culture is critical, we'll have more to say in a future post, but suffice it to say, it's worth getting external help to create, implement, and embed culture.
Invest in training and development so that your team is equipped to handle whatever comes your way. Your employees are your most valuable asset. Show them that you care about their wellbeing and career development, and they will stick with you through thick and thin. If they want to climb, your job is to hold the ladder.
Get savvy with your hiring practices. This is connected to your culture, or why people choose to work for you. Prospective employees don't just look at the pay check. They want to know that they will be challenged and have opportunities to learn and grow. They want flexibility, likely including some form of hybrid home and office working arrangement. They want support. The pandemic has wreaked havoc on people's mental health and as a result, employees are placing greater value on their work-life balance.
Have a Plan B
Simply put, where are the areas where you can get ahead of the game? Think about your supply chain issues. Can you buy items now that may increasingly get difficult to come by later? This could include things like raw materials, finished goods, or even office supplies. Perhaps you can order larger quantities to take advantage of economies of scale or switch to a different supplier who may be less impacted by the current situation.
You should also think about your customers and how they may be affected. Are there ways you can help them weather the storm? Perhaps you can offer discounts or extended payment terms. Maybe you can develop new products or services that address their specific needs during this time (we've written about this previously).
Finally, do you need to think about a mindset shift? Perhaps your Plan B is a counterintuitive move that sets you up to exploit improved trading conditions. As our Managing Partner Chris Dionne would say, “can you zig while others zag?” This type of thinking is well worth bringing in outside help to assist you in reframing the context.
Small to medium businesses can ride out the storm of volatile markets, labour force shortages, Covid-19 impacts on supply chains, and more, by focussing on the above areas. Why survive, when you can thrive?
Is your business "storm-proof"? Read more about building a sustainable, profitable business in our free eBook More Time. More Revenue. More You.