How resilient are you? That is the real question that you must consider.
You own a small manufacturing business with a healthy profit and loss and balance sheet, but during a severe economic downturn, demand falls and you begin to return trading losses. Are you going to be able to ride out the storm? Some customers will default, leaving you with a need for finance to meet some fixed costs. You seek a short-term loan to bridge the gap until you can get costs under control but bank lending to small business has dried up. You need finance fast and it is nowhere to be found. Identifying and considering these such scenarios can help you prepare and be more resilient to shocks.
Wall Street indices predicted nine out of the last five recessions! – Nobel Laureate Paul A. Samuelson, Sep, 19, 1966.
Changes in the macro economy can have broad-ranging impacts on small business, affecting the availability and cost of finance, the cost of other inputs, product demand, and, particularly for those exposed to fluctuations in the exchange rate, the price of goods sold. A number of banks and other parties provide regular forecasts of the macro economy. The two-year forecast of the most banks appears to be reasonably consistent in predicting steady economic growth.
Don’t let the consistency of economic forecasts give you a false sense of security. Like others, economic pundits and prophets tend to groupthink. If you do not understand “groupthink,” it means the practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility.
A sudden change in economic conditions can have a significant impact on a small business. Many small businesses will have experienced the challenges of a tightening of credit that occurred during the global financial crisis (GFC) between 2007 and 2009.
How you best prepare for such scenarios depends on circumstance but regardless, an important starting point is awareness of the potential implications of a sudden change in the economic environment and the need for resilience to bad shocks. Changes in exchange rates are also important. They can significantly affect prices received by exporters, the price of import competition domestically, the cost of key inputs and demand for services such as tourism or education. In 2008, the dollar fell in value by almost 30% in three months before climbing rapidly again.
The economic environment can change suddenly. There is great uncertainty with economic forecasts and a degree of “groupthink” in most forecasts.
Sometimes the disruption you have to be prepared for is along the lines of a major infrastructure project that is planned to occur near your small business. It may increase congestion and make it more difficult for employees to get to work, suppliers to deliver to you and customers to visit. The noise and vibration might also impact your business. To address such issues you might need temporary changes in your opening hours, your supply chain or even your physical location. Such changes would in turn have implications for customers and employees. Planning for such changes may better help manage the impacts.
In light of the uncertainty, as a business owner, you should consider how resilient your business is to large changes in key economic variables such as: interest rates and the availability of finance, the exchange rate, and consumer demand.