Diversification and financial management are key strategies
The recession of 2008-09 may have occurred nearly a decade ago, but it’s still a painful memory for many entrepreneurs. More recently, the decline in oil prices has caused a slowdown in producing regions that has hurt business owners.
Unfortunately, economic downturns are a fact of life when you’re running a business. But there are steps you can take now to prepare your business to weather a storm and emerge even stronger.
“Entrepreneurs often know they should be prepared for tough times, but they don’t always take the necessary steps,” says Tom Corner, an economist at the Business Development Bank of Canada (BDC).
Here are five ways you can recession-proof your company.
1. Grow your customer base
It’s hard to overemphasize the importance of increasing the number of customers you have. According to a BDC study, nearly one in six well-established businesses had encountered financial difficulty because of losing a single client.
“Very often, businesses are not prepared to deal with the unexpected loss of their biggest client or contract,” says Corner, who authored the study.
2. Focus on your finances
Solid financial management is vital for ensuring your company is ready to weather an economic downturn. Entrepreneurs need to have early warning systems to let them know when trouble is brewing, says BDC Business Consultant Alka Sood.
“The numbers tell you the truth about your business and you need to embrace them,” says Sood, who works with business owners to improve their financial management skills.
She recommends that entrepreneurs set up a cash flow planner. To do so, use a spreadsheet to record projected revenues and expenses for the next 13 weeks and then update it each week. This allows you to get a handle on when payments from customers are expected versus when suppliers must be paid. You can then plan for periods of tight cash flow, coming projects and financing needs.
Sood also recommends you set up a financial dashboard, showing four or five key performance indicators on the financial health of your business.
3. Offer new products and services
It’s easy for business owners to get comfortable with the products or services that have been successful for them in the past. However, broadening your line-up may be the key to surviving during the next recession.
In fact, you may not even have to come up with something completely new. Instead, you might be able to repurpose your products for another market, Corner says. For example, manufactured products used in the oil and gas sector could be effective in other areas with just a few changes.
“Our research showed that having a range of product and service lines can be an important form of diversification,” Corner says.
4. Expand internationally
International expansion is another great way to diversify your business. If your sales dip in Canada, you may be able to make up the shortfall in markets with stronger growth.
“Exporting opens up a lot of opportunities,” Corner says. “Canada has cultural and economic ties with the U.S. and Western Europe, and our small and mid-sized businesses can often be very successful there. Those markets, in turn, can be a launching pad to higher growth emerging markets.”
But international expansion requires careful planning and market research. BDC, Export Development Canada and the Trade Commissioner Service are among the organizations you can turn to for advice and services.
5. Stress-test your business
As the last recession proved, some circumstances simply can’t be foreseen.
That’s why it’s important to run through various scenarios now, including how you’d handle a sharp drop in sales. While you’re at it, look at different crisis and disaster scenarios and put contingency plans in place to deal with them.
“Look at things like: What happens if our input prices rise because of the weaker dollar,” Corner says. “What if key people in your business were all of a sudden unable to come to work because of illness or a natural disaster? Unexpected developments can derail businesses. ”
- Innovation counts—Successful businesses offer new products and services often and quickly adopt new technology.
- Get help—Networking, hiring consultants and setting up an advisory board are ways successful businesses get external advice.
- Map it out—Developing a strategic plan with specific targets will help to keep your business on track even as economic conditions change.
- Master financial management—Keeping tabs on your finances allows you to plan better, see trouble brewing and react quickly.
This article is courtesy BDC for Small Business Week in Canada.