We are going through a major economic crisis, which has been compounded by several major events hitting us simultaneously. Many business owners are uncertain of the future. It can be easy for an owner to get stuck in a state of firefighting and panic in an attempt to safeguard their business.
But that is not the way to build a resilient business. Standing back and checking you have the right foundations in place is the best way to prepare for the recession and build for the future. But what are these foundations?
Learning from cloud-based businesses
During lockdown, Cloud and SaaS businesses reported strong financial results, many buoyed by the scramble to remote working. It is worth noting that some of these companies also had structural advantages that made their business model more resilient.
These advantages include flexible business terms, easy customer on-boarding, minimal infrastructure, and agile offerings to suit needs and evolving requirements. Flexible business terms allow customers to buy on a monthly basis, and thus scale (or cancel) in line with their needs. Easy on-boarding minimises friction for the customer and decreases time to revenue. Minimal infrastructure and inventory mean cloud-based businesses can flexibly scale their operation to meet demand. Cloud services are typically agile and can quickly adapt to changing customer needs or regulations.
Even if your business is not cloud based, there are elements of these foundational strategies that ought to be considered. To start with, it is best practice to optimise your systems and processes to gain efficiencies and cost savings. For example, explore your customer acquisition strategy, and how you can further optimise the customer lifetime value (LTV) against the customer acquisition cost (CAC). If your business is affected by inflation, supply chain shortages, sanctions, import delays and new tax tariffs, there are other strategies to build resilience. These are best explored and implemented post a thorough review of your business.
Common sense strategies
Every situation is different, but there are some common-sense takeaways that businesses can apply to increase their ability to withstand economic storms.
By including a force majeure clause, it helps remove liability for natural and unavoidable catastrophes that may interrupt the expected course of events and prevent contracted parties from fulfilling obligations.
In the event of inflation or deflation, you should adjust your pricing in line with the CPI. This protects you in the event of rising costs from suppliers, who may increase their prices monthly (or in recent cases, as we have seen on a daily basis). Although your prices may change, there is a strategy and approach that minimises customer churn.
Prepare for fluctuations in foreign exchange. If you operate in a foreign currency, consider fixing the exchange rate with your suppliers or including provisions that allow your prices to be adjusted with your customers. Or both.
Negotiate extended payment terms. Smart businesses aim to build a buffer between their income and outgoings to manage cash flow. For example, if you offer customers 30-day payment terms, you should aim for a minimum of 45-60 day payment terms with your suppliers.
Require valid quotations before accepting an order. While verbal or indicative commercials are perfectly normal, however it is strongly advisable to accept an order only if it is accompanied by a valid and approved quotation. This reduces the risk of changes in price, availability, or timeframe.
Work with multiple suppliers. It’s remarkable how many businesses don’t see supplier management as a strategic issue until things fall apart. Being dependent on a sole supplier limits your ability to negotiate and introduces a single point of failure. Avoid it where possible.
Business is a team sport
Treat customers and suppliers like partners. Business is a team sport and works best when it’s based on trust. If we take a team mentality to business, we see our suppliers and service providers as part of our larger team. They all contribute in some way to the success of the business and to the business goals. When we can openly collaborate on challenges and solutions, everyone benefits, and business will thrive.
Mitul Ruparelia is the founder and principal of Citius Partners. He has over 20 years of experience in delivering exponential revenue and margin growth.