The media is ripe with warnings of an economic downturn. So, in this newsletter we attempt to provide seven virtues we’ve identified that help micro, small and medium enterprise (MSMEs) endure economic recession.
1. Risk management
Risk management is the bedrock of a sound business. It’s tempting for MSME owners to stick their head in the sand and avoid thinking about emergencies affecting their business but there are some simple things that can be done to prevent an emergency becoming a disaster.
One of the lowest cost risk management strategies is developing an emergency response plan. This involves identifying the things (e.g. people, plant, premises and processes) that are critical to the business’ survival, listing the risks to each and working out how operations can continue if any of these critical features are interrupted.
Insurance should be part of the emergency recovery plan. Beyond the insurances that are mandatory for different business-types, a recovery plan helps identify which other insurances would be critical to the business, and its owners’, financial survival. The Department of Innovation, Industry and Science provides a list of the many insurances available.
Self-insuring by accumulating reserves to provide a buffer if the unexpected happens is also a virtue identified in successful small MSMEs. We often see chronic insolvency situations where MSMEs start-up on credit but never ‘catch-up’. In fact, capitalisation doesn’t grow beyond the original $1 or $2 start-up contribution. MSMEs need to watch their numbers closely, have a capitalisation goal and develop a plan to get there.
2. Knowing the numbers
To stay on top of the numbers, MSME operators need to know what the numbers mean. Profit and loss, balance sheets and cashflow statements help them keep a finger on the pulse of their business.
They don’t have to know how to prepare these statements and forecasts, but they do need to know how to interpret this language of business. The Queensland Government’s business website provides a good explanation of how to interpret business financials.
Understanding where the money is coming from, and where it goes means that MSMEs can make informed business decisions.
3.Strategic decision making
Tough decisions are business as usual in any business and need to be based on cold, hard facts. Every dollar of business money spent should return something to the business.
And every decision should consider the business’ strengths and weaknesses, and the environment that they are operating in.
Their own financials and employees can give MSME owners the internal picture of the business and paying regular attention to industry publications and bulletins will provide insight into external changes that could affect operations. The bigger the decision being made, the more information MSMEs will need to find.
4. Strategy or opportunity
When times are good, and money is rolling in it is tempting for business owners to attribute success to their own efforts. While your client may experience success it’s important for them to understand if it’s genuinely a result of their business strategy or merely an opportunity that came their way (such as a change in government policy or the failure of a competitor). Without this insight, an upturn can quickly change to a downturn. And in either situation, the good times should be used to put resources aside for the bad.
A virtue of successful MSMEs is their ability to document their strategy of success and duplicate it.
Which brings us to the next virtue of successful business. Businesses are more motivated to put financial resources aside in good times, and duplicate their successes, if they’re know how and why they’re doing it. So, it’s important for MSMEs to have a plan. It can be as simple as a goal to achieve a certain net cash flow, or it can be as specific as having detailed operational plans. A plan helps MSMEs make better business decisions and keeps them focussed on where they want to go.
6. Capitalising on strengths
Knowing a business’s strengths and weaknesses will help MSME operators spot the difference between golden opportunity and a threat. Their business exists because of their competitive advantage, because they do something better than the competition. When the lure of big bucks tempts them to throw caution to the wind and rush into new territory yelling seize the day, they need to reflect on their strengths. Is it their area of expertise? Do they have the capabilities needed? A sudden departure from their competitive advantage may see them overpromising, underdelivering and competing against solidly performing incumbents.
7. Growing a team
Every business can be a team effort, even if they’re a freelancer or sole trader. An accountant can be a valuable team member beyond simple compliance work. A business adviser’s knowledge can be critical when MSMEs are facing strategic decisions or sudden expansion. Successful MSMEs choose a trusted, well-rounded business adviser and they’re not shy of paying for advice when it is needed. Over time others with specialised areas of practice can be added to match the expanding business needs.
Sometimes businesses falter despite the most virtuous management. Consider including business rescue and restructure specialists on your MSME clients’ teams of go-to advisers if they are concerned about insolvency, the earlier the better.
At Shaw Gidley we have over 70 years combined experience in all facets of personal and corporate insolvency including turnaround management.
Contact us for any solvency or turnaround assistance you may need.