In the current environment, a fine balancing act is taking place between putting a handbrake on inflation by tightening the monetary supply through interest rate rises, and tipping the economy into a deep recession. The consensus of economists is that inflation is the lesser of the two evils given its long-term effects.
However, in an inflationary environment, businesses are now caught in the crosshairs of rising costs exacerbated by increased interest rates, and a reduction in revenue as demand from consumers with less discretionary spend dwindles.
The depth of this problem is likely to occur over time; revenue will fall progressively as demand diminishes, but it’s unlikely to fall off a cliff (with the exception of some sectors). Likewise, a lot of New Zealand businesses – particularly larger ones - are either sheltered from the interest rate rises through hedging policies or have borrowed with fixed interest for a period of time. But interest rates will bite as those hedges expire, and fixed rate loans come up for renewal.
But what can you do if you weren’t prepared and find yourself facing the squeeze?
Interest rate management
While the markets have already priced in the current rises and any that may follow, businesses can still protect themselves against the potential for additional interest rate rises by investigating fixed rate loans or hedging. There won’t be a short term benefit in doing so, but this can protect the business in the event of unexpected rises if inflation spirals out of control.
There is also the option of refinancing debt with another lender. Although credit criteria is tight, banks are still looking for business and the right clients will be desirable to banks no matter the conditions.
Focus on revenue
Despite the potential for a general reduction in demand, it’s still possible to achieve an increase in revenue, depending on your market and products or services. It’s a great time to focus on what’s working well and minimise investment in activity which isn’t. For example applying the 80/20 rule, where often 80% of your revenue comes from 20% of your clients or products – focus on that 80% rather than devoting time and effort to the rest. Often when there is space to focus, new products or opportunities arise which can produce additional revenue.
A natural response to tough economic times is simply cutting costs. However businesses need to be smarter about where costs should be cut. Most businesses incur “lazy” costs which creep in when business is going well and strong fiscal management is not as much of a priority. This might be pure discretionary spend, such as travel when technology can be used for meetings instead, or when it should occur, such as delaying capital expenditure for six months. There may be harder decisions where real cuts need to made, but these should be weighed against the downsides of doing so. For example if you reduced employee numbers, how will this impact revenue generated from the delivery of products or services? Will more staff be needed once the recession lifts? How will you cover the costs of recruiting and training new team members? And, if you can’t find staff, how will this impact your recovery? Cost reduction strategies may be as simple as renegotiating contracts, looking for alternative suppliers, or reducing the frequency of these expenses.
When times are tough, there is generally a slowdown in the collection of debtors. Maintain a focus on getting that cash in the door – often it’s simply a matter of who shouts the loudest gets paid first. Cash flow management can also ensure there is clarity around when cash comes in against when cash needs to go out. Aligning these so expenses are paid only when the revenue comes in, or prioritising what gets paid first, can save dipping into expensive overdrafts or having to go to the bank for additional funding.
Look for opportunities
Tough environments present opportunities for businesses. New markets arise, competitors close down making way for more market share, and acquisitions can become cheaper to invest in and grow.
There is also an incredible amount of knowledge sitting with the employees of any organisation. Tap into that knowledge, make them feel part of the journey to seeking solutions which can strengthen their connection with your business and provide a greater pool of opportunities than might be available.
New Zealand businesses also operate within a global market, and there is potential for growth in the overseas even when the New Zealand market is under pressure. The rest of the world is at different stages of being affected by economic conditions which provides opportunities for New Zealand businesses.
The key message for businesses is to take time to review the business and its plan. There is a danger in making quick short-term decisions without thinking of the long term implications. Take advice, get a different perspective, be prudent about business expenses, have detailed cash management information, and look for opportunities.
There is always light at the end of tunnel during a downturn – the challenge for businesses is how get there faster and in a better position than before.