How to protect your business and survive through these volatile times
Market volatility and economic uncertainty have been at the top of the news lately with headlines about tech lay-offs, the economic downturn, and RBA rate hikes. Things are only going to get worse with a recession looming.
However, there are ways small to medium businesses can continue to drive business success during challenging times. It’s critical they do; of the 2.6 million businesses in Australia, 98 per cent of them are small to medium businesses
Here are three steps you can take to protect your business during challenging times:
- Prioritise profitability
Prioritising profitability instead of growth is essential to ensure your business continues to operate during turbulent times caused by rising interest rates. Small businesses should achieve this by focusing on growing and investing in their highest-performing products and services. This generates more revenue to help increase profit.
Businesses also need to ensure they have sufficient funding for profitability; a very common pitfall of early-stage start-ups is a funding shortfall. Planning and accounting for additional costs that are often left out — such as marketing, labour costs, and insurance — help businesses identify how much funding they need to be profitable.
- Experiment with pricing strategy
Pricing is all about finding the sweet spot between turning a profit and enticing your target customers. As businesses continue to be affected by inflation, there is a need to review current pricing models and identify how to best reach your target audience. Businesses need to be willing to experiment with different pricing options and test what works best.
Adopt a tiered pricing model: Offer customers a variety of prices based on certain features. These tiers allow your customers to make options that best suit their needs.
Offer competitive pricing: Track your competitor’s prices and ensure you are offering comparative pricing that pits your products against your competitors.
Use early adopter discounts: When you are just getting started, it’s absolutely critical to get users to test your product and give feedback. Lowering your price or giving the product away for free will allow you to retain the original price as an anchor but clearly communicate the real value of your product offering.
- Manage cash flow
Seasonal fluctuations can leave some businesses with quiet periods short of cash when bills come along as usual. A strategic approach to cash flow management can prevent this from happening. This includes having an optimal working capital ratio between 2:0 and 1:2, which can help manage the day-to-day operations of running a business.
Working capital is used to fund daily operations and meet short-term obligations. If a company has enough working capital, it can continue to pay its employees and suppliers and meet other obligations, such as interest payments and taxes.
Businesses may look into getting a working capital loan. This is where funds will typically be credited to a business’ bank account periodically. An overdraft is another option. Unlike a working capital loan, it is a line of credit that is always available to access when the business is short of cash.
Variables to consider include the interest rate, any collateral you will need to raise to access the funds, the loan’s term, fees, and the frequency of repayments. The right path for your business when it comes to cash flow funding will depend on the industry in which it operates, the risk appetite of the owners, and the maturity of the business, as younger businesses tend to be more inclined to pursue growth opportunities than more mature ones, though there are notable exceptions.
Make more informed decisions
From revisiting the fundamentals of business to experimenting with new pricing models to taking proactive steps to manage cash flow, these are some ways small to medium businesses can continue to thrive and achieve high profitability even during economic volatility.
The economic landscape is always changing and to make the best decisions, businesses should always ensure to do quality research. If you have questions in relation to the above, or any other matters, please do not hesitate to contact our office on 1300 620 345.