Recession proof your business

Running a small business is no mean feat, especially during a lengthy bout of weak economic growth. With the country now in a recessionary environment, it is bound to remain difficult. But a more deliberate approach to money management could mean survival during trying times and set your business up to thrive when the economy recovers.

The economy slipped into a technical recession following two consecutive quarters of negative growth between October to December last year and January to March this year. “The recession, if you want to be strict about it, happened already. You’ve been living through recessionary conditions in the fourth quarter and the first quarter of this year. Business owners need to start thinking about what is going to happen in the second quarter,” said Nedbank economist Busisiwe Radebe.

Typically, two quarters of negative growth would be followed by a rebound. However, the cabinet reshuffle and subsequent credit ratings downgrades have weighed on confidence and are likely to temper the rate of recovery, she explained.

Radebe added that the prevailing economic conditions will continue to affect consumer spending and contribute to a slowdown among most businesses, especially in consumer-facing industries.

“Our clients don’t need to be told that we’re in a recession. Our clients, the small business community, are probably the ones that understand and feel the effects of it quicker than the corporate sector as changes in the corporate sector aren’t felt as suddenly as they’re felt in the small business community,” said Alan Shannon, head of relationship banking sales at Nedbank.

He suggested small businesses adopt a considered approach to money management to navigate through and ensure survival during the recessionary environment.

According to , small businesses must think more carefully about how they spend their money and ensure that they remain cashflow positive. “That doesn’t mean that they sit with credit balance in their bank accounts. It simply means that they generate more cash than what they’re spending. And if they’re not, then they really need to reflect on their business and potentially on the expense side of their business,” he said.

Shannon said entrepreneurs should also reconsider their propensity to take on debt. If necessary, businesses must only take on debt to fund growth initiatives and create more positive cashflow rather than to fund losses. “In our experience, we’ve seen many a small business fail not because they’re not profitable but because they don’t manage their cashflow well and they start turning from being cashflow positive to being cashflow negative.”

He added that small businesses should also try to shorten their working capital cycle, which would result in improved short-term liquidity. The cycle, a measure of the amount of time that it takes a business to transform its current assets, net of its current liabilities into cash, can for example be shortened by reducing the credit period given to customers while increasing the credit period provided by  suppliers.

Further to that, Shannon said small businesses should ensure that surplus funds are earning a return or are used to negotiate early payment discounts.

He also said that it is important for businesses to latch on to opportunities arising from the closure of competitors so as to position themselves for an economic recovery.

Nedbank expects domestic economic growth to fare slightly better in 2017, in line with an expected rebound in global growth and an uptick in commodity prices, compared with 2016. It also sees an improving trend over the next two to three years.

For now, however, Radebe said it would be prudent for small businesses to remain cautious and adopt a “wait-and-see” approach before making major decisions. She said the South African Reserve Bank’s leading indicator, which is used to forecast changes in the economy, as well as credit and car sales data, may provide businesses with a good idea as to when a turnaround may occur. Increased enquiries from potential customers and increased traffic to a business’ website may also signal improving conditions for the business in question.

Whether you are starting a business, running an established business or looking to expand, you need a reliable, affordable banking partner who understands the challenges of your business and responds with flexible solutions to your needs. Nedbank has extensive experience in serving small businesses and offers a comprehensive suite of payment, investment and finance solutions, as well as industry specialisation and services that extend beyond banking. Why not contact one of our small business experts to help you see money differently and take your business to the next level? Call, email or visit www.nedbank.co.za/business for more information.