How will a “severe” recession really affect your business?

Last night the International Monetary Fund declared the world will experience the deepest and longest recession since World War II, with global economic growth set to slump to -1.3% this year.

The bad news comes just days after Reserve Bank documents revealed the Australian economy is likely to contract by around 1% in 2009.

But what will a deep and long recession actually mean for Australian SMEs? Here are a few of the key issues entrepreneurs will need to watch out for.

Cashflow

Every business owner knows how tight cashflow is getting – average payment terms have now stretched to over 57 days, almost twice the standard term.

The message from Dun & Bradstreet chief executive Christine Christian is; get ready for cash to get even tighter.

Her agency revealed yesterday that it has downgraded the risk ratings on a record number of businesses in the last six months: 150,000 business are now considered at risk of not paying bills on time and 130,000 companies are rated as being at increased risk of failure.

It’s time to start monitoring cashflow every week, if not more often. Late payers must be followed up immediately, and don’t be afraid to pester them for your money – the squeaky wheel often gets the oil.

If you feel your debtors situation is getting out of control, consider getting help from a debt collection agency – most of them only charge when they collect the debt.

Customers

According to Westpac’s consumer confidence index, households are actually feeling a bit more positive about their situation right now. Don’t expect this to last. As soon as unemployment starts to rise (and most economists are tipping it will hit 9% in the early stages of next year) then consumers will shut their wallets.

This is the time to look hard at your customer base and try and figure out how a recession will affect them. How is their sector performing? Is the CEO getting grief from head office overseas? Are they a subsidiary of bigger group that is struggling?

Not only will this help you identify the customers who could be at risk of not paying on time, but it will also help you pick the customers who are in the best position to get through the recession.

Make sure you get especially close to these customers. Most customers are going to be far less tolerant of mistakes and far more demanding of discounts and better payment terms, so relationship management will be crucial if you want to meet their needs and protect your margins.

Directors and investors

If you are feeling nervous, so are you shareholders and board members. They are going to want to see even more information about cashflow and financial performance. Keep talking to them and remember the golden rule – no surprises.

Take a tip from Bakers Delight general manager Chris Caldwell. His company is going to the extent of checking the financial health of their shareholders (in this case, their franchisees).

“One thing we need to be very cognisant of is what their own financial position is like, and whether they as individuals have suffered anything outside of Bakers Delight, whether the investments they have got have faltered and are placing them under stress.”

Access to finance

As cashflow becomes tighter, bad debts increase and more companies start to collapse, the banks are going to clamp down even more tightly on business lending. New finance will be more difficult to come by and the process by which the banks have been re-rating businesses and increasing the loan rates will continue.

If you want money, be prepared to be asked for a wall of documentation. Tony Markwell, national head of privately held business at Grant Thornton, says banks want to see “three-way” forecasts, where a cashflow statement, a profit and loss statement, and a balance sheet are combined.

However, it is likely that the recession will weigh heavily on business investment, which means the fewer companies are going to need to access finance.

Managing people

Leadership and people management are going to become even more important as the recession drags on.

First, you’ll need to get your labour cost base right. If that means making staff cuts, do it sooner rather than later. If you want to try and hang on to staff for the recovery, you’ll need to look at options such as four-day weeks, leave without pay or salary reductions.

Second, you need to keep your team motivated. Gary Cohen, chief executive of software provider IBA Health, told SmartCompany recently that this all comes down to communication. “Obviously, you can’t share everything that is going on in your mind, but you have to give enough visibility that you are looking after their long-term interests and that you are looking after the business’s long-term interests. If staff think you are out for yourself or looking after somebody else’s interests, they won’t trust you.”

Finally, think about whether you can pick up any talent in the downturn. Federal Treasurer Wayne Swan has warned unemployment could hit 10% by the end of the downturn, which means there will be good people dying to work for you.

Stress

Getting through this recession will not be easy. SmartCompany blogger and clinical psychologist Tim Sharp has a few tips for dealing with stress:

•-         Simplify; take some time to clarify what’s really important (and what’s not) and stay focused on your real priorities (personal and working).

•-         Keep up your energy; don’t let your diet, exercise or sleep slip. It’s hard to be happy if you’re literally sick and tired!

•-         Develop optimism; face up to the cold hard realities, what ever they may be, but make sure you face them in a constructive way, and in addition, do what you can to also actively search for positives.

•-         Don’t feel you have to do it all on your own; resilient people are better at reaching out to others and appropriately asking for help.

•-         Use your strengths to deal with your problems; give some thought to what you’re best at and how you can use these attributes to take on these adverse circumstances.

•-         Practice gratitude; as bad as things might seem try not to forget that there are almost certainly others worse off.