A small business survival kit for tough economic times

René Botha | 22 March 2024

René Botha is the regional investment Manager at Business Partners Limited.

Running a small business in an economic downturn, while upping productivity, protecting your profit margins and staying on track to achieve your operational goals, is a daunting task.

Despite this, there are many examples of South African small and medium enterprises (SMEs) that have succeeded in putting buffers in place to help them weather the financial storm. The Business Partners Limited’s SME Confidence Index shows cashflow remains an ongoing challenge for local businesses. The answer to thriving in tough times lies in building and attaining financial resilience.

Doing business in an era characterised by sluggish economic growth, is challenging for several reasons. In times like these, new risks and vulnerabilities arise, which can threaten a business’s survival and long-term sustainability. These include supply chain disruptions, exchange-rate fluctuations, increased import costs, reduced production capacity and tightening credit conditions.

Consumer behaviour changes

Another ripple effect of tough economic times involves changes in consumer behaviour. In an environment of high inflation and rising interest rates, any dramatic increase in the cost of living will ultimately dampen the buying power and confidence of everyday consumers.

As a result, discretionary spending tends to decrease, leading to increased price-sensitivity and the dwindling consumption of non-essential items. Any small business outside of the household consumer goods industries is bound to feel the pinch.

Economic uncertainty may also prompt customers to seek alternative products or services, switch to lower-cost providers, or postpone purchasing decisions altogether. Within this kind of economic climate, marketplace competition intensifies, as the existing pool of small businesses compete for the attention and spend of a more limited customer base.

Ways to survive

The solution to surviving – and thriving – through (and beyond) these kinds of conditions, lies in strategic planning. While factors such as marketing, partnerships, and product or service innovation can play an important role in ensuring business continuity, there is much that can be done in the realm of financial management to maintain buoyancy. This includes the following four strategies:

1.  Build an emergency fund

The way a small business deals with and mitigates risk, can play a vital role in whether it succeeds in remaining competitive and staying afloat. Apart from having the right kind of insurance as a safety net, it’s also important for businesses to implement their own internal risk management strategies as additional safeguards. One of these methods is making regular and consistent contributions to an emergency fund.

Having immediate and unrestricted access to a cash reserve can provide SMEs with a much-needed bailout in times of disruption. Contributions to this emergency fund should be seen as a non-negotiable on the balance sheet. When the unexpected occurs, this can provide quick financial relief to handle unexpected expenses in times of lower revenue, address temporary inventory shortages or pay staff members.

2.  Use smart financing to get ahead

At some point along the small business journey, entrepreneurs usually find themselves needing to apply for a business loan or other type of funding for working or to facilitate the launch of new product or the business’s next phase of growth. In tough times however, it’s essential to be able to handle this debt responsibly and diligently, to ensure that it is deployed in the most efficient way possible.

When faced with undue economic pressure, it’s therefore important for SME owners to seek expert guidance and advice on how to use small business funding in a constructive way. For example, any business loan acquired should be used solely for the purpose it was intended for, such as purchasing equipment, expanding operations or investing in marketing initiatives. The temptation to deviate from the plan can be great in times of financial difficulty, but discipline can go a long way to prevent a temporary setback from becoming a permanent one.

3.  Keep it lean – but do it as a team

Another important element of developing financial resilience is to cut costs and increase saving. These are two of the most basic principles of effective cashflow management, but as simple as they are in principle, many SME owners find them difficult to implement.

This is why it’s important to make cost-cutting and saving a company-wide objective that could even be incentivised if necessary. Team leaders, managers and key decision-makers can make a valuable contribution to moderating the behaviour and choices of staff members.

By remaining steadfast in their commitment to the business’s mission, values, and long-term goals, people in leadership positions can succeed in rallying their teams to overcome challenges, seize opportunities and move forward as a collective.

4.  Look for new income opportunities

The old adage, “one man’s loss is another man’s gain” rings true in a difficult economic climate. The failing of some businesses presents an opportunity to meet their remaining customers’ needs, and the same applies to your customers developing new needs and requirements. Now is the time for you and your team to keep track of what is happening in your industry so you can take advantage of any new opportunities as they present themselves.