Only the fittest SMEs will survive the coming recession
Small to medium enterprises are the life blood of modern economies. In Ireland for example, up to 56% of the national workforce is employed in by Small to Medium Enterprises, that is to say companies that employ less the 250 employees and would include local industries and mom and pop business outfits. From the United States to Germany and beyond small to medium enterprises are responsible for a large component a countries transactions, employment, provision of goods and services and general day to day activities and are critical to the health of any economy. Given the increasingly uncertain economic climate critical questions must be asked – How can these critical and indigenous industries survive a rapid economic contraction – can they react to a swift fall off in demand for goods and services; do they have the management skills and Management Information Systems to not only recognise the problems but be able to formulate a cohesive response; how robust are their finances; how flexible are their employees? Concerns are growing that with the economic success enjoyed by many countries over the past ten years we have inadvertently created a weak and desperately soft underbelly – That is to say we have forgotten how to manage our business competently. Many small businesses have grown lazy and despondent and lack the management skills needed to properly navigate their business through difficult times.
A lot of evidence strongly supports the risk of recession; the question is now only what shape the recession will take; short and sharp or long and shallow. Historically the businesses that have the best chance of surviving a recession are the ones able to scale down costs in response to economic threats. Business must take action if they are to get in shape and stand a chance of surviving a potential recession, preparations need to be made.
Gather financial data.
Senior management need to consult with their accountants on a weekly basis, at least at first. The purpose of this exercise is to gain a full understanding of the business’s cash flow. Assets need to be evaluated and liabilities assessed and a line by line critique of all income and expenditure items.
Cut the fat.
Your business needs to get on the treadmill and shed a few kilos. All non core activities that utilise assets in an unproductive way should be jettisoned. Businesses need to be active in those areas were they hold a competitive edge. Activities that are not critical to the core function of the business should cease.
Optimise your assets
Businesses need to ensure that every asset is being utilised to the maximum extent possible. If you asset is not working as hard as a competitors assets that you need to reassess the need for those assets.
Take control of your liabilities.
Having a dynamic business that can react to its environment is key – when things are good the business can grow and when things are bad the business can shrink – but always in a controlled manor. Liabilities that are inflexible will cripple your business in a downturn, as your revenue fluctuates you will be stuck forking out for the same old expenses. By analysing you liabilities you should seek to replace any inflexible terms with flexible terms. Loan repayments – can you negotiate a range of protective measures that you can activate should you need them i.e. Switching to interest only in off seasons, prearranging payment holidays etc. It is critical to have pre-negotiated many of these flexible terms before you actually need them. The more options you can bring to bare quickly the better. Another key area that should be looked at is labour costs. Staffing will be most businesses largest expense. Therefore you need to have a plan at the ready as to what staff should be let go, and what key tasks can be provided by employees that are retained on a temporary basis. Every contract leading to expenditure should be revaluated – you should seek to have the maximum amount of options so that you can scale down the expense of any and all contracts without incurring penalties Our respective Governments have a key role to play in preparing our countries for a downturn. Their response must be predicated by thorough analysis of the causes and effects of a downturn.1. – Understand the nature of the downturn – Loss of competitiveness due to currency rate volatility. – Loss of consumer confidence – Heavy burden of consumer and corporate debt – Poor management skills within indigenous industries – Poor data Infrastructure 2. – Plan a response that can reduce the effect of the recession. – Invest in Management education; promote business health checks, business mentor schemes. – Reduce bureaucracy – streamline government services – Invest in IT infrastructure – Utilise tax planning to reward internationally focussed business and embryonic strategic businesses. – Support entrepreneurship – Support and expand business investment schemes
In Ireland we have many unique benefits that can be magnified with the proper government policy. Chief amongst these benefits would have to be our membership of the EU. We also control our own taxes and we are the worlds only English speak Euro denominated country. We can attract international business and can place ourselves as a conduit for US / EU trade. We also enjoy one of the widest and most accomplished cultural networks in the world.