South Africa’s economy is not in good shape, with Stats SA announcing on 4 June that the economy shrank by 3.2% in the first quarter of 2019. This has been the biggest drop in 10 years, and if SA’s economy shrinks any further the second quarter of 2019, the country will enter a recession. Economists have been warning of an economic downturn caused by depressed expenditure and investment in the economy, weak demand, the impact of load shedding, and continual falls in mining production.
Many business owners find it difficult to determine what needs to be done to sustain their business through tough economic times. Outsourced Finance’s Malusi Cwele has reflected long and hard on this matter and highlights three core actions that drive growth in SMEs during tough times:
1) Focus on customer value
When customers experience the pinch of a decrease in revenue or disposable income, they are forced to reevaluate what they are spending money on and assess whether it adds value. This means that products and services that deliver the most value for money and solve real problems tend to succeed in tough economic times. They are also the ones that are remembered when conditions improve.
Reconnect with your customers and understand what they value most about your product or service. This can help you understand which elements can be temporarily removed from your offering to provide more affordable pricing to your most important customers. Driving a conversation about value demonstrates your commitment to meeting the needs of your customers and typically results in greater retention. Understanding the drivers of value can help refine the customer-offering and prioritise potential cost savings in delivering value.
2) Reevaluate your cost structure
After understanding what drives value to your customers, it is important to focus your expenditure on items that support your business in delivering that value. This enables the business to reduce costs without sacrificing the value that your customers expect.
Most businesses start by reassessing their suppliers and initiating conversations about payment terms. This is particularly important in scenarios where the debtor’s book is growing. Obtaining credit terms with your suppliers can greatly support cash flow. This may lead to renegotiation of contracts, as most suppliers are not excluded from the changing economic conditions – so trying to renegotiate is worth a shot.
Be careful about cutting your marketing budget. Tough economic conditions may warrant stepping up your marketing efforts. You need to guide customers to find your products and services and motivate why they should choose your business instead of your competitors.
3) Protect your cash flow
It is important to understand the leading indicators for your business and be aware of changing economic conditions. Preparing cash flow projections for the next 6-12 months is important to understand the risks. Aim to plan your funding as early as possible in case further funding is required.
The most important step is understanding your customer payment behaviour and the risks associated with the operations of your largest customers. Weeding out unprofitable customers is crucial to supporting the cash flow in your business – rather focus the resources of your business on customers that pay. Take action to speed up payments by invoicing timeously and, if needed, take steps to encourage early payments, such as offering early settlement discounts, or using collection services when necessary.
The key to safeguarding the future of your business as much as possible is planning. Helping small businesses prepare for the future is what we do – it’s our passion. Contact us to help you set your path for the future.