In my contribution to the last edition of this magazine, I had noted that 2016 will bea difficult year for Nigeria in particular and the rest of the world at large,as the economic headwinds which characterized 2015 still extend to the New Year. It is no longer news that Nigeria recorded a negative Gross Domestic Product (GDP) growth rate of -0.36% in the first quarter of 2016. Should this be the case by the end of the second quarter, then the Nigerian economywill officially be in recession.
A recession is defined as a period of economic downturn. Technically, if a country records negative GDP growth rates in two or more consecutive quarters, then such economy is classified as being under recession.
Managing your business through a period of economic meltdown will be severely daunting. Ordinarily, small businesses face myriads of obstacles even in normal times ranging from financial and sales challenges, to human resources and management of suppliers. These impediments become even greater during periods of recession.
Often times, recession is characterized by extraordinary market-place pressures, decreased staff morale arising from inevitable pay cuts, downsizing and other rationalization measures, weak market demand, inflation and hike in the cost of basic amenities, and exorbitant taxation as the government struggles to generate enough revenue to stimulate the economy.A research by HBR suggests that only 9% of companies come out of recession stronger than ever.
Of these few, small businesses are better positioned to navigate the turbulent waters of recession. They are small and nimble, courageous and innovative in approach. They are more flexible and better placed to take advantage of obstacles, and see opportunities even in hard times. They are less bureaucratic andhave more elastic operating systems.
Here are six steps that will help you steer your business through the tide of economic meltdown:
- Check your Cash-flow and Income Statement Regularly
There is no better time when “cash is king” than during recession. Entrepreneurs must maintain a clear trade-off between increasing sales and maintaining a healthy cash flow. To succeed in these hard times, you must establish a strong credit policy which seeks to contract credit expansion. This step is important because with the attendant high risk of job losses being one of the major consequences of a recession, retailers and small businesses are likely to suffer credit losses where some of their customers lose their jobs.
Akin to this fact is the need to minimize concentration of credit exposures on certain customers and segments of customers. This, in effect, means that businesses must have a good understanding of their customer segments and must properly dimension the possible impact of a recession on such segments. The most effective strategy to contain this risk is to diversify credit sales across major segments and customers. There should be a defined credit limit per customer segment.
- Manage your Costs Effectively
Experts agree that one of the quickest wins under a recession is to cut costs. However, cost structures differ across industries and businesses. You must examine your cost profile to know what percentage is fixed, semi variable or variable. Fixed costs are those cost items which do not change with change in volume or number of outputs, sales or units. They are said to be fixed over a relevant range. These are called committed costs. They include rent, depreciation, license fees etc. Notwithstanding, all costs are variable in the long run.
Variable costs are those cost elements which change as a result of changes in business parameters such as sales volume, number of customers etc. In order to contain variable costs, managers must be able to identify the key drivers of such costs. To manage such costs, you must control the drivers. For instance, to manage your fuel expenses, you must reduce the distance your car travels daily.
Effective cost management requires that you focus on the major cost lines that are variable within the relevant range of activities. Focusing on the most significant variable cost lines can provide levers for profit improvement and enhancement of your financial performance. Stop every activity that is not a value driver for your business in a period of recession.To do this, and do it well, you must clearly define what “value” means to you. Value analysis, is therefore central to havingan effective cost containment strategy.
Shedding workforce may seem like the lowest hanging fruit, but the truth is that this measure should really be the last option open to you. Staff cut can be counterproductive both in the immediate and at the turn of events. It has the potential of weakening the confidence and commitment of the surviving employees. When the economy rebounds, you will be faced with staff shortages, and high replacement cost in terms of recruitment expenses and learning curves. Therefore, managing staff cost should be a strategic agenda of your business. Businesses must design recruitment policies that adequately protect it against indiscriminate hiring leading to excess workforce. Full time employees may be complemented with a squad of contract staff whose employment terms are renewable yearly.
- Provide Excellent Customer Service
Attracting and retaining customers under a period of downturn requires customer service qualities that not only meetexpectations but wows the customers. The nimbleness of small businesses coupled with the inbuilt flexibilities in their operating systems enables them to provide tailor-made services to their customers all year round. SMEs are able to maintain close contact with their clients and can also effectively track their lifestyle.
Keeping a close contactwith your customers is a prerequisite tool to having an excellent customer service. You can do this by sending constant messages to keep yourself in theminds of customers and making them feel you care about them. This is much easier for small firms than for big conglomerates. Your operating margins may shrink, but you need to hold on to your customers at all cost.
- Incentivize your Employees for Customer Acquisition
As recession bites harder, it is possible for small companies to acquire more customers who may be looking for smaller and cheaper providers of their product/service needs. Remember that what some blue-chip companies may be selling is their brand, and not utility. So higher prices may not necessarily translate to higher quality or better utility. In periods of recession, many customers seek utility rather than prestige and packaging.
Customer acquisition will be further enhanced if you provide incentives in form of bonuses and commissions for employees who win new clients. Acquisition and retention of new customers is the key to surviving the recession.
- Be innovative
Creativity, intellect, vision and experience are levers of success for small businesses under economic meltdown. Emotional intelligence, technical skills, competence and a mastery of the digital world will count as a major point of departure in the business climate of today. Where these features manifest, they enhance the ability of the company to employ the steps discussed above to win in the market. Winning is the only option for you.
- Keep the presence of God
Finally, and most importantly, you must keep the presence of God all the time. God’s promise to bless the works of our hands is not absolute. The scripture tells us in Psalm 1 that those who work in the way of the Lord shall be like trees planted by the rivers of water that bear fruit in and out of season, and whose leaves will never wither. We have a duty to do things in the way that God teaches. Our father in heaven is a just God and He expects us to do our business with fairness and justice. We must neither cheat our customers nor maltreat those who work for us. When we play by the principles of God, then the words of Psalm 1 will be our portion.
NB: Mark Oguh, a Fellow of Institute of Chartered Accountants of Nigeria and a Financial Management Expert wrote in from St. Anthony’s Parish, Gbaja, Surulere, Lagos. Contact firstname.lastname@example.org
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