Surviving the boom and bust cycle

in Money by Anthony Fensom
(4 Ratings)
boom and bust cycle

It's the curse of economists everywhere: the business cycle that constantly moves from peaks to troughs.

From a property boom and bust to the recent mining "super cycle" and slump, Australian businesses have experienced good and bad times over the past decade, with various industries either surging or sinking. Economists expect the major economies to stage an upturn this year on the back of global stimulus measures, yet international concerns have weighed on sentiment in Australia, despite the likelihood of a 22nd straight year of economic expansion in 20131.

How can you prepare your business for potential good or bad times ahead?

Watch cash flow

Keep a close eye on cash flow by monitoring performance and projections on at least a monthly basis, and maintain a buffer of at least three months of overheads. Generally, your payment terms will reflect the industry standard, but do not be afraid to make your terms at the shorter end of the scale to bring in cash quicker. Be careful also to not expand too quickly during an upturn by adding extra costs, which may prove difficult to dismantle when the economy sours.

"Stick to your knitting by focusing on the areas you are good at and don't diversify into every idea that seems promising," says accountant and business adviser Tetsu Watanabe2. "Try and keep a high proportion of variable costs, which are easier to adjust to reflect business conditions."

By preparing some worst-case scenarios for cash flow, such as a 20 to 30 per cent drop in revenue, it can be possible to assess which areas need strengthening. Lower official interest rates should also improve business loan terms, so talk to your lender if you're not getting the best deal.

Stay close to customers

The customer is still king, and if a general downturn hits, your clientele will likely suffer along with the rest of the business community. Look for opportunities to build relationships, such as supporting clients' charitable activities or holding joint events or seminars on industry topics of interest. Make customer feedback an automatic part of your operations and incorporate it into your service offering.

While marketing expenses are often seen as an easy item to cut, look for cheaper alternatives such as email newsletters or social media rather than reducing your presence completely.

Marketing to existing clients is far easier and more cost-effective than winning new ones, with studies showing it costs up to six times more to obtain a new customer3. But, do not become overly reliant on a major client; instead, try and diversify the client base to reduce risk for the business.

Innovate and outsource

Innovation is key to the long-term competitiveness of your business, so do not shirk from investing in research and development. Can your products be modified for new markets, different demographics or genders? Porsche sports cars were traditionally targeted at men until the German automaker realised the potential in the female market. The introduction of the luxury SUV Cayenne has seen it gain a new generation of women drivers4.

Outsourcing non-core areas of your business is another effective means of developing a recession-proof business by becoming more flexible and reacting more quickly to growth opportunities. While the recent case of a US tech worker who outsourced his own job to China was an extreme example, advances in modern communications have allowed for outsourcing or offshoring of nearly all business processes5.

Take advantage of a downturn

Finally, take advantage of quieter times to increase staff training and improve company products and services, including marketing activities. It is far cheaper to add to existing skills rather than having to spend on recruiting new employees should the business go on a sudden growth spurt.

By increasing recruitment efforts during a downturn, it may be possible to attract highly skilled staff who would likely demand higher wages and conditions during stronger economic conditions.

With the global economy seemingly set for better times, now is the perfect opportunity to make your business resilient enough to ride the boom-and-bust cycle well into the future.



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This article represents the views of the author only and not those of American Express.

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Anthony Fensom

Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.

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