The Winter of our Discontent?

As we approach the end of another fiscal quarter, with an election in the offing, continued stubborn inflation and matching high interest rates, together with some generally negative sentiment, we have to ask if this is indeed a period of economic discontent? If so, what can be done about it?

We have had a year of highly unusual weather events that have had a decidedly negative impact on certain sectors in various affected regions. Against that, the falling price of milk solids is creating economic tension within the agri-sector, all exacerbated by the combination of high interest rates and inflationary conditions.

At the end of the last fiscal quarter there was yet another negative rate of growth recorded, albeit a small one, but that meant we are now technically in recession and the economists are predicting yet further shrinkage in the near future.

We do not wish to sound like prophets of doom and gloom, but we think things are likely to get a bit worse before they get better. That said, there is always a light at the end of the tunnel, it’s just a matter of how long that tunnel is and how best to navigate the way through the darkness.

There is no doubt that the economy has slowed; data shows a decline in discretionary spending and it does not take an economist to know that this means lower demand for goods and services against a backdrop of rising costs, as the average man in the street does it tougher than they were three years ago.

For the New Zealand SME this is likely to mean reduced turnover and with operating costs remaining high we believe it is timely to re-visit some defensive techniques and strategies to suggest how there might be ways to navigate this particular economically tough period.

We always recommend, at times like this, to revert to getting the basics right and to avoid desperate strategies that may come back to haunt at a later time.

Most critically, now is the time to develop a sound plan – to follow the basic principles of good governance, identifying the risks your business faces and how to mitigate them. It is a time for bold thinking in development of strategies to manage customers, employees, suppliers and external risks such as IT hacks. Hope for the best but plan for the worst.

In times like these, you should be communicating with your staff, your customers, your suppliers, your bankers and most importantly, your professional advisers.

Many of you reading this will have seen our previous mail-out wherein we talked about the CAMEL approach, namely careful management of Capital, Assets, Management, Earnings and Liquidity.

Ensure you have the appropriate capital structure and that your business has sufficient working capital to get through a lean period. This is where your bank comes into play. Be proactive and front-foot discussions with them about ways that they can help you to optimise your business’ capital requirements, using tools such as refinancing or debt re-scheduling.

Management, at times like this innovative leadership and management is essential. As mentioned above, this is the time for management to be considering the risks the business faces and how to manage them. Remember that in times of adversity, there are also opportunities and management needs to recognise where they lie.

To ensure that your business is lean and mean and able to get through tough times, consider your asset structure and ask what assets may not be performing and can be realised to free up the necessary working capital. Manage those assets carefully; for instance, make sure your debtors are paying you on time and you don’t have too much capital tied up in slow moving inventory.

It goes without saying that earnings are vital. In the face of reduced turnover, there has to be action to control operating overhead to keep the business profitable. We don’t know how long the predicted economic downturn may last so be careful in managing profits. Enduring losses are not sustainable and will put the business under threat.

Cash flow is the lifeblood of any business. While profits may be likened to food and water, cashflow is like oxygen. Without it, the period of survival is likely to be short so focus on liquidity. In times of adversity, management must be ruthlessly determined in preserving it. Consider revisiting provisional tax estimates and looking at ways to match cash in and outflows.

Our economy has weathered storms before; and we will do so in this one too. Your business has survived challenges in the past and will again, with some careful strategies in place. In the meantime, remain positive and take care of the health of yourself, your people and your business.

We are here to help you and if you have any questions about how to navigate your way through these difficult times, then please contact your Ecovis KGA adviser.