A significant number of small and micro businesses are facing crisis. At the beginning of the year, a survey found 89% of small business owners were concerned for their future, with 40% seeing profits fall in 2023. As we hit the mid-year mark, we can see that, since then, times have become even tougher and are likely to be even tougher going forward. The cost of doing business is rising, with fuel and electricity costs in particular putting immense pressure on margins.
We’re also seeing consumers tighten their belts, affecting spending patterns and creating a bumpy road ahead for SMEs. For example, while dining is up year-over-year in South Australia, bar takings are down. This shift in behaviour is just another way businesses are feeling the strain.
These issues have been a recurring theme in recent conversations I’ve been having with industry experts and SME owners. And due to these escalating pressures, even if interest rates were to start easing now, it would be two years before we start seeing the early signs of consumers loosening their purse strings. Another future threat is potential changes to immigration, driven by the housing crisis and changing policy landscape. The longitudinal impact of not importing the right skills mix to Australia is going to be very dangerous for our future productivity.
Together, these factors make it crucial for SMEs to remain vigilant, adaptable and prepared to adjust their strategies to weather the economic storm ahead.
Be prepared and flexible
Some sectors will likely be impacted more than others in the event of a downturn. For example, while hospitality is struggling with changing consumer habits, the luxury goods market won’t experience as much volatility.
A more rigorous strategic approach to decision-making is crucial for SMEs. This can be supported by establishing advisory boards or tapping into networks for tailored help to navigate the economic challenges ahead.
Adaptability is also key. As we saw during the pandemic, many businesses only survived by pivoting their operations overnight. SMEs must be flexible and prepared to shift strategies as market conditions change.
Every difficult economic period is different, but there are characteristics that businesses that successfully pull through share. Companies that win during these cycles continue to plan for growth and execute their plans. They tend to do a better job at focusing on fewer, bigger opportunities and mitigating risk in implementation. Prospects that seem more distant should be parked for now and it would be wise to focus on core operations and close adjacencies to ensure stability and manageable growth. For example, if you are a clothing business, focus on maintaining your main clothing line and don’t be sidetracked by expanding into a completely unrelated new product line (eg makeup) when times are tough.
Time to consider M&A?
In financially challenging environments, there will be opportunities for SMEs to acquire quality assets, whether it’s other businesses, IP or equipment, through mergers and acquisitions. It’s much harder to do M&A when the tide is rising for everyone, as valuations go north, but we’re currently heading into a cycle where acquisitions are likely to become more affordable.
To take advantage, SMEs can do these five action items right now:
- Scope out acquisition targets: identify potential acquisition targets close to core operations
- Model financial benefits: analyse the financial advantages of potential acquisitions
- Consult advisors: seek advice on funding options for acquisitions
- Consider partnerships: explore partnership or merger opportunities if facing financial distress
- Focus on innovation: direct innovation efforts towards adjacencies close to core offerings.
With any merger or acquisition, managing culture is critical. Up to 75% of post-merger integrations fail due to cultural clashes. An M&A strategy must encompass gaining a clear understanding of your own culture, including your values and norms. Then, you must determine the culture of the target company and create an integration plan. This is also where external advisors can be critical because it’s not the core competence of most businesses to facilitate this kind of integration.
As we step into the next financial year, SMEs must remain proactive and aggressive about growth where opportunities look lucrative, plus avoid the mistake of being so bogged down as to neglect scanning the environment for governmental help and other types of support.
In times of downturn, it’s even more important to stick to fundamental business practices, remain vigilant when operationalising opportunities and be humble enough to adapt. This results in long-term benefits for the business, and the wider economy, given the crucial role that SMEs play in the Australian economy.
As a wise man once said, no one can cost cut their way to prosperity.
By Ryan Williams, director of the Australian Centre for Business Growth, at UniSA Business
This article was first published by Smart Company