With almost 30 years of continuous growth here in Australia, an economic downturn is something that can catch business owners unaware. Causing them to worry about the future of their business.
As we saw in the GFC, many businesses went into this period in panic mode. Rather than going back to basics and focusing on the core activity that made them successful in the first place, business owners start trying to think differently. Meaning they ended up chasing unrealistic projects and relationships that they thought might save the business, instead of honing in on what they already do best.
With an economic downturn on the horizon, we take a look at the basic mistakes business owners make during these times. And how you can avoid making them in your business.
Managing cash flow the wrong way
The first thought from a lot of business owners when the economy gets tough is to try and stop cash going out of the business altogether. They look at ways to reduce expenses and cut costs. While that is all very well, there is a limited amount of expenses that can be cut, because the essentials of running a business will always remain.
Unfortunately, what happens when you simply focus all your attention on the outgoings side of your cash flow, it then stops funds from coming into your business. Flip it around and switch your focus to the cash coming in. What are the ways you can get money flowing in quicker to your business?
This could be taking actions to speed up payments your business is due to receive. Know your numbers and get a good handle on the past history of your clients, in particular, who the late payers are. Then ensure you promptly follow up any late payments.
Review your credit policies and determine whether you can reduce your payment terms. While this could be tricky for existing clients or customers, for new business it can be a solid approach to improving the regular flow of cash into your business.
By the same token, see if payments that you owe to your suppliers can be extended. So, you can keep cash in your business as long as possible. Are there any contracts that you can renegotiate to provide better terms to help cash flow?
By doing a quick estimate of how much you have tied up in debtors when you’ve paid suppliers quickly, what excess stock you have stored and what work you have not yet invoiced you’ll soon get a clear picture on where you need to focus your attention to get the funds flowing in.
One of the first mistakes business owners make in a downturn is to stop focusing on innovation. It’s not uncommon to feel overwhelmed during these times, and you spend all your time fighting fires with day to day tasks and start to lose sight of and neglect innovation in your business.
This can be because most people associate being innovative with incurring costs and set unrealistic expectations around what they would like to achieve. But a slowing economy is exactly the time when being innovative can deliver the most benefit.
Outshining your competitors by delivering an innovative quality experience can be a particularly smart move in an economic downturn. In what ways can you be innovative when it comes to your core product or service? Work out your most profitable products or services and find ways to keep improving them. Being laser-focused on your profit-making areas will be a better investment than trying to diversify during these times.
Are there different ways for you to approach new markets? Now is the time to get creative, rather than just battening down the hatches and hoping to come out the other side okay.
Neglecting important relationships
It’s not uncommon to feel overwhelmed if business slows down as a result of the changing economic conditions. What can sometimes happen at times like these is you start to neglect relationships that you have with your suppliers or those customers that have supported you for years.
But it is these people you will need to rely on during a downturn. All parts of your business depend on healthy relationships. Ensure you are taking the time to keep your core relationships strong. Focus on your key clients that make up a large part of your income, but don’t lose sight of the smaller clients as they may grow. While you might be spending time on these relationships and not recognise a direct benefit straight away, these are the people that will help you come out the other side stronger.
You also want to focus internally on keeping relationships within the team strong. In an economic downturn, stress is high and staff morale can plummet. So now is the time to reward and motivate employees in non-cash ways and help them to feel safe and supported through these times.
Thinking outside the immediate realm of activity
While you want to ensure you are always innovating your core products and services, some business owners can instead focus their attention on feeling there is a need to innovate into something new.
They start to form unrealistic relationships and start new projects that need a long-term approach in order to reap the benefits. Effectively giving in to shiny object syndrome and taking their focus away from the immediate goal – meeting their current sales targets.
The reason this is a common occurrence in a deflated economy is that business owners start to feel that what they have been doing in the past is no longer good enough. They are fooled into thinking that just because the economy is taking a downturn that what they are doing isn’t right. Often using a drop off in \ sales as a reason to abandon what is, in fact, a very good plan.
What they have been doing is often right. They just need to do what they do best better during this time. Hone in on what has worked before and focus the attention there, instead of putting up walls to achieve your immediate sales targets by trying new things that don’t help them right now.
It helps to remember that in a lifetime of a business, a downturn becomes just a blip on a graph. Plan your large business improvements over a longer time frame and focus your immediate attention on improving what you are already doing well.
Chasing all sales leads
When sales are slow, many businesses make the mistake of ignoring or compromising their lead qualification process, expending considerable time and resources trying to convert low quality – stillborn leads.
During a downturn, it’s more important than ever to have a tight qualification process for your leads so you can really focus your attention on legitimate prospects. Not all leads are created equal.
Discount your products and services
Another incredibly common mistake is to have a knee jerk reaction to a decrease in the number of sales you are making, and immediately turn to discounting your prices. The common thought is that making something more affordable will see sales improve.
But at what cost?
Are you bringing revenue back up at the expense of profit? There is no denying that cutting your prices eats into your profits. The short-term boost can feel good, but how do you go about raising your prices again?
Think of it from your customers point of view too. Reducing your prices can mean they start to think whether you were overcharging in the first place if you can afford to offer such a sale now. They may also be worried that in uncertain times, you are offering sales on your products as your business is about to close.
When you offer discounts, you are putting your product or services primary focus on price. And when that’s your only competitive advantage you can run into trouble. Instead, look to offer value to your customers so they can rely on you to deliver quality products and services every time.
There are other ways to increase demand instead of resorting to slashing prices. Take a step back and look why business is slow. Is it perhaps seasonal and you saw similar drops at the same time last year?
Cutting back on buying what you need
If your business is feeling the effects of an economic downturn then it is likely that your suppliers are going through a similar time too. Some of them may take the above approach of cutting their prices to help increase sales, and this can benefit your business. Take advantage of the savings by buying in bulk, as you’ll save money over the long term.
There is nothing wrong with spending money to make money if it ensures you are getting value. Renegotiating supplier contracts can work favourably during a downturn.
While the economy is slowing down and there is some negativity in the media, remember to remain level headed and always go back to what your business is doing right. Avoid making these mistakes that can end up having a much greater impact on your business, then riding out the downturn and focusing in on what you do best.