Sunday, September 1, 2019

If you're an Australian small business, should you prepare for a 2020 recession?

The real risk of a recession in Australia

In an opinion piece written for the Financial Review on Aug 29, 2019, the former Australian Prime Minister Kevin Rudd argues that Australia has a one-in-three chance of entering a recession in 2020. 

He points to various geopolitical and global economic forces which can impact on Australia and cause a significant economic downturn.
  1. The escalating U.S-China trade war
  2. The likelihood of a hard Brexit, with no trade agreement being reached between the U.K and Europe
  3. An extended  10 year period of growth in the U.S economy, with fears a long overdue correction may be imminent
  4. A near-crippling amount of debt in European countries such as Greece and Spain
  5. Escalating tensions between the U.S and Iran
  6. In 2019, a ballooning U.S federal deficit approaching a staggering $1 trillion
  7. Stock markets becoming increasingly nervous and fragile to any bad news. 
Rudd says that the global storm clouds which are gathering require some major government policy shifts - only then could a recession be avoided. But besides Rudd, there are many other commentators who warn of a coming global recession. 

Here is a headline warning written in the Guardian in early August, 2019 -

Here is another headline from a recent August 2019 New York Times article - 

The risk of course, is that once enough people start believing that a recession is imminent - then it can create a self-fulfilling prophecy. Consumers become excessively cautious and conservative in their spending - impacting upon business sales, cash flow and profit.

Having said that, we cannot ignore that the Chief Economist of the Australian Institute of Company Directors, Stephen Walters, in a recent speech delivered to Melbourne University's Faculty of Business, said this - 
"The only uncertainty surrounding an impending recession in Australia is when it will happen"
Here is a short video recently produced by, warning of the risks of a recession for Australia  in 2020 and describing seven signals which point to it -

So what does this all mean to you as a small business owner? .... The formal definition of a recession is commonly taken to refer to "two consecutive quarters of negative economic growth"

What tends to happens in a recession?
  1. Jobs disappear, and the unemployment rate rises. 
  2. Entrepreneurs have trouble getting the financing they need to start new businesses
  3. With less disposable income rattling around the economy, existing businesses may be forced to close their doors. 
  4. Those that stay open are much less likely to expand their operations or otherwise make new investments. 
  5. Real estate values may fall, even though monthly mortgage payments stay the same. People who lose their jobs may lose their homes, too. 
  6. The stock market collapses, wreaking havoc on investment portfolios and retirement accounts. 
Small business tips for surviving a recession

So what can you do? ...... Let's not over-react or panic - it would be way to premature to say go and buy up stocks of gold for currency, sell your stamp collection and go live in the hills. ....... However, some common sense steps are still warranted to prepare your business for a potential major economic downturn -
  1. As afar as reasonable, reduce discretionary expenditure
  2. Start squirrelling away some of the current business profits to save for leaner times that might lie ahead.
  3. Consider whether it might be prudent to delay major capital outlays, such as the purchase of new equipment. Or perhaps consult with your accountant as to whether leasing rather than buying new equipment might be the wiser option, given the economic uncertainty surrounding next year.
  4. Improve cash flow by chasing up sooner any outstanding invoices - and consider offering customers a small discount as an incentive for earlier payment
  5. Review inventory levels and see if reduced stock levels might be appropriate for some stock
  6. Work hard at keeping your customers - let them know you appreciate their loyalty. Look at ways of rewarding loyal customers. Look at ways of adding extra value to your customers, before you ever look at lowering prices.
  7. If you need to reduce labour costs, consider reducing hours rather than cutting staff (although ensure all members of the team truly are working productively)
  8. Be open with your staff. Explain the challenges the business faces. But be optimistic that you will get through the downturn together - and ask your staff to look for any opportunities where the business can operate more efficiently
Worrying won't help

There's no point worrying about global forces that are beyond your control. It would be unhealthy to become anxious and panic about the prospect of a recession in 2020........ Besides, nothing is certain here - but when the weather radar starts indicating storm clouds are heading your way, then it's usually wise to at least prepare to take a raincoat out with you.

There are some simple things that you can do now in your business that aren't too radical.  Small actions you can take - that will help you to prepare and position your business for a potential economic downturn next year. ....... And remember too, that any downturn will always be a temporary one - and that opportunities for growth and expansion will eventually follow.

In business, if there's one thing I've learned over the years, it's this ..... There is a time for boldness - and a time for prudence. Success partly relies upon judging the circumstances that you will be facing - and then acting accordingly.