Preparing for Economic Winter

Riding a bull market in a good economic climate seems easy. All you do is keep checking the key vital signs are there and stay on the bull. Full employment and cheap money (that’s easy to borrow) are the key signs I look for.

If the above is in existence the bull you are riding has momentum left. If this changes he might be getting tired and grumpy and you need to prepare to get off.

In many places around the world these conditions have been in place for a long time. In Australia where I live, it has manifested rampant asset inflation over 3 decades now (aside from some minor pullbacks). Property, Land, Vehicles, Nostalgia Assets, Gold, Commercial R/E, Franchise prices. You name it, everything that isn’t in offical inflation statistics has gone up enormously in price.

Sidenote: CPI (Consumer Price Inflation) is designed this way to keep it low and reduce it’s volatility. By leaving critical stuff out like house prices. Wages and interest rates are kept low. This is because wages are often indexed or benchmarked against inflation data (e.g. Unions/Employers/Government all watch CPI versus wages) and so are interest rates (by Fed Reserves. e.g. Reserve Bank)

Cracks in this “Everything Boom” we are in have appeared in the last year or two. In Australia our property market pulled back significantly. Enough in fact to attract bargain hunters. This is the crowd of people who missed the last run, they were out gunned and are now playing catchup football.

The great conditions Australia has had since our last recession circa 25 years ago have supported businesses with poor practises, weak cashflow and high debt levels. These businesses are carried by the boom. Mistakes are easily forgiven. There’s lots of these businesses. In the startup community the volume of weak survivability businesses is extremely high at present (also thanks to the startup lie that pervades that community).

Businesses have been protected by a wave of cheap and easy to access money. This wave is also being ridden by allowing easy ways to leverage. Just as it has in the investment property sector, small businesses can adopt leverage also. Borrow to grow. Leverage. Countless ads on TV by non-bank lenders are encouraging just that.

Official stats will imply business credit growth might not be as bad as we think. That’s another lie, like the CPI one, because personal credit is at record highs, surpassing the pre GFC levels. When you dig into numbers you realise many small businesses actually rely on these personal credit cards for cashflow. It’s a key finance tool. I’d argue it is likely to be the dominant form of micro and small business finance.

I’ve worked through a recession as a professional trader in the 90’s and a few economic crisis’s since then (Asian Financial Crisis, Dot Com bust, Global Financial Crisis). I often get the flutters, a gut warning, that something isn’t right. It’s intuitive but I research from first principals and often find some things are actually wrong, it’s not just a feeling.

I experienced this a couple of years back, the warning flutters, while Saasu occupied WeWork. Some scary stuff exposed itself to me there (see Lessons from WeWork’s puppy culture). I also got to experience first hand how naive the banking sector C-Levels can be around technology and market risks. It’s not their fault, they have been focused on a Royal Commission here in Australia, just trying to get the basics right. They haven’t had time to grasp the idea that they are actually a technology business now, no-longer in banking in the traditional paradigm sense. The curse of having old heads stuck managing old paradigms.

So back then I felt uncertain, things seemed to good, too easy, and so casual. What could go wrong. I was conscious however that bull markets always extend much longer than people expect so in the face of financial indicators around me starting to turn south I started to harden and de-risk our own business. Expecting I might get 12-18 months to do that.

Since then interest rates are starting to fall, confirmation from governments that they see the problem ahead. Quantitive easing has started again in the United States (this time to save the Repo market – too complicated for this post).

This phenomena in markets where the good times just keep going in the face of bad data is called a short squeeze. People try to pick the top, try to position themselves for the slowdown, seeing the bad data, but the weight of money, cheap money, raw liquidity drives its tractor treads right over them. They keep getting crushed by rising stock and property prices. Asset inflation. Eventually when they give up trying to pick the top the market inevitably falls away. That major down move can take a year or two before it finds its bottom.

Preparing your small business for winter

De-risking a small business is very important toward the end of long boom. I’d like to provide some ideas as to how to do this. What I wont do is provide a timing. This is an educational piece and not specific financial advice.

In short, Work hard and squirrel nuts away for winter.

Get motivated to do this. Protecting your family and their interests in your business success is my motivation.

There’s lots you can be doing in the buildup to the slowdown:

Close deals

Deals are lost be slow closure and unforeseen events. Customers change their strategy. People acquiring your business might change their strategy.  Before you know it the acquisition is off the table, that term purchasing contract is pulled, that no-brainer JV is cancelled. I suggest a bird in the hand approach. Lock it in.

Sell some equity in your business

This reduces some of you concerntration risk. Usually people are heavily exposed to residential real estate (if they own a house) and the business/industry they are in (generally). In financial planning they always talk about reducing risk through diversification. One way to reduce risk is reduce/sell some equity in your business and reinvest that elsewhere to create diversification. However, be warned that new shareholders can create risk and problems.

Clearing business assets

Owning real estate in Australia is cult-like. Our almost unique negative gearing situation for investment properties has fuelled the worship. So it’s possible you may be holding investments in commercial/residential property in your business model. You want to sell. Your small business cashflow may be funding that. Consider that liquidity, the ease of transacting, in the property sector drops in weak economic times. I’m not suggesting you sell property, I’m just suggesting that if that’s your plan and you think prices are going lower you may have more liquidity now than you do when prices drop. The lack of action bites you. Lack of buyers in a falling market is essentially lower liquidity. Less buyers is equal to less market participants.

Note that a common mistake is that if you are selling with the ambition to buy a more valuable asset you want lower prices. The difference between prices shrinks as prices go lower. Thats just economics 101. So the difference, the extra funding for the more expensive property is less.

Lock in contracts

Finding ways to term secure your sales channels with contracts or JV’s. This may help if they are the type of contract that might suffer in weak economic times.

New Marketing

Developing and opening alternative lower cost marketing approaches. Nearly everyone buys ads in local papers or Ads in Google. Do these work, have you checked? Spend some time investigating your ROI on these. Maybe some alternative marketing strategies are worth looking into.

Cautious HR

Avoiding pre-emptively hiring staff to fill new growth projections. While proven when there is no end in sight for growth, it becomes risky when the warning bells are ringing. Hire as needed.

Selling your business

Sometimes it’s good just to get out. Personally I like the don get out but use you succesful business to get into another model. I like the QLA model Dan Pena teaches. Also I like the portfolio approach of multiple businesses. It’s personal because of lifestyle factors but I raise this one because if you are thinking about it and the market is still good, then exiting in the slowdown is much harder.

Avoid loan sharks

Avoid the new Hybrid Loan Shark. Plenty of them are circling your TV channels convincing small business they can easily borrow money. Mostly, these are a crossbred shark. A traditional non-bank lending business model crossed with a loan sharking business model. They had a baby, it seems cute but it still has nasty teeth. Often these teeth are a 30% per annum (and more) interest rate when I have reverse engineered them. A shit deal, I won’t sugar coat it.

Reno your credit rating

Check your credit rating and take actions to fix it. To make things worse the banks know all about the Hybrid Loan Sharks and if you are using them they will be impacting your credit rating. Move to lower cost non-bank lenders with interest rates commensurate with credit card rates or lower if you are maxed out with you bank.

Consolidating debt

Personal loans, credit cards, family/friends and fools loans. Try and replace these will lower cost funding from banks, supplier credit lines, and some FSP’s who are non bank but have reasonable borrowing rates. Put simply try and reduce your interest rate cost and risk on borrowings. Why does this reduce my interest rate risk? I’m a borrower? When things get bad in an economy weak financial institutions that lend have to pay higher interest rates to borrow money (that they lend to you), so your borrowing rate goes up accordingly.

Renegotiate with suppliers

Look at your primary suppliers first that have the biggest impact, then work your way down the list to a point of diminishing returns for your time.

Find new suppliers for your business

It’s easy to get comfortable in relationships in business. Sometime you need to try new suppliers. They also give you pricing power and leverage in old supplier negotiations. Assess loyalty with suppliers on a case by case basis. Loyalty is often not present when the shit hits the fan.

Downsize your office


Use systems automation, robotics and operational re-engineering to reduce the cost of product/service production. This is capex but timelines to payoff might be months or just a few years.

Offshore, outsource, insource or reverse-source

I like keeping jobs here in Australia but when we as employee’s (I’ve been an employee) ask for too much money versus foreign labour we have to accept the trade off employers are faced with. Unions might hate me but the fact is we see the effects of this. Australia’s car industry was destroyed by international wage arbitrage. Business owners have every right to remain competitive and go offshore. Sometime you have to consider the employees you protect by staying in business and weigh that against the ones that you lose by offshoring or outsourcing. Some is better than none. No Ford or Holden in Australia. Let that be the lesson.

Sometimes bringing the work back home is better. You can move to a higher quality, higher price model and differentiate yourself.

Country risk

Consider that in a global economic crisis if it were to happen, military, currency and trade conflict risk increases dramatically. We are seeing this now. Which countries are you dependent on or at risk too. For example China is a much more risky place to be doing manufacturing in now if you are an Australian company than it was 2 years ago. This is not the fault of small business or the Chinese people who are some of the hardest workers in the world but the reality is that the risk profile has increased on that.

Product tranches or repositioning.

It’s good to look at price points. In the GFC Saasu received a lot of business from customers shifting from more expensive products down to our online accounting app. Tranche your product offering to meet this. Do you have a lower cost option that removes some aspects or features of that product or service that might help keep customers needing to save money or attract customers from competitors.

Risk and opportunities analysis

On a slow economic scenario what assets could you buy, what customers could you win, what industries could be disrupted, what sales or market channels could you commence?

Raise capital

A war chest of cash is a good way to improve the surviability, the credit riskiness of a business in the eyes of banks. You are improving your balance sheet and working capital position. Even if you are just using this to reduce debt.

Work your financials

Review who, how and where your sales come from. Like a portfolio manager, you can drop the worst performers (products/services/customers) and increase investment in the best ones. Even add new ones. Make sure you aren’t investing fresh in something that is susceptible to the economic downturn.

Work your gross margin

Looks at costs and expenses incurred that create your margin. In weak economic times the businesses that can withstand the most margin pressure do the best. They can survive price wars. You can see the battle scars (and deaths) in the retail sector on this issue.

Improved cash flow management

In this is easy because there are tools to calculate forward cashflow.  Creating accurate financial forecasts can reduce uncertainty and most importantly “fear” in the business owner. Sleep better.

Preparing for war

Sometimes the best way to prepare for battles ahead is to clean the barracks and train the troops right now. Optimize operations and systems and review you standard operating procedures. Maybe look at shifting from old paradigms (like software) to cheaper cloud based apps and mobile workforce practices. Test and implement changes. This will free up future resources to focus on sales/marketing when the slower times hit as you have done the prep work already. As my wife Emma always quotes to my children. “Prior preparation prevents poor performance”

Implement security systems.

In difficult economic times crime escalates in business but it’s also about productivity. Humans inherently aren’t honest. The evidence everywhere is overwhelming. Oversight and accountability helps keep these commercial relationships honest.

At this point some of you are saying. “Jeepers this guy is old school. What about trusting people”. Sorry trust is for people who run startups. 99% of you go broke relying on concepts like trust and loyalty. Most successful going concern business owners I know will agree with me. Trust and loyalty are the most hard earned things in business.

You will see it my way some day, when you are the risk taker, the employer, the victim of theft or dishonesty. When you have as many lacerations from dishonesty as me, then you’ll see it my way.


Stronger together, EBITDA accretive, business risk reduction are some of the benefits of a merger. This is a huge area so I would suggest having your Business Mentors and Advisors go over this with you to work out if it’s an option.

Create cash reserves

New cash reserves or increasing existing ones including legal conflict reserves. Why shouldn’t you be the doomsday prepper of small business? Stock up on cash and bullets for when the #SHTF day arrives. The analogy here is what causes business “survivability”. Cash is King, but customer retention is the Ace. What activities, assets or people can facilitate this. What cash can you put aside for doomsday scenarios like a recession or depression. What moats of protection can you ad to your offering to reduce churn and increase loyalty in your customer base.


The sharing economy is great, why not. Owning stuff is anti-minimalist. I like owning something if I use it often and I want “Control”. Look at offices, equipment, people! Yes staff can be shared between companies. Find fellow entrepreneurs to swap resources with. You may both own “X” but could sell one, share it and free up some cash.

Fire customers, nicely.

I think it’s a common misperception that you have to accept every customer that walks through the door. It’s your business, you don’t have to. There isn’t a law that says you have to enter into a contract with all prospective customers. If you have customers that you identify as unreasonable, and you aren’t breaking the law in firing them, then you should let them go. Don’t do this because you stuffed them up and they don’t like you. What I’m referring to here is incompatibility. What you offer and what they want a different, it’s not personal. If they get upset and angry at you for this they are being unreasonable not you. They have choice between suppliers, you don’t have the ability to offer unlimited variations of product or service. You go broke trying to do that.

Debt restructuring

In conjunction with your bankers and accountant look are interest rate restructuring opportunities. The yield curve has inverted in some countries. That means long term interest rates are very low so you have the ability to lock in long fixed term interest rates much lower than normal. Noting that rates can always go even lower in a recession or depression situation. It’s about timing and specific circumstances and thus I can’t provide any guidance beyond this.

Credit safety nets

Establish credits lines for just in case scenarios. Factoring (invoice financing), overdrafts, business lines of credit etc. could be a last resort saviour in the depth of a recession.

Bargain hunting list

Create an opportunity list ready for the slowdown. For example, buying a customer base or some IP via a trade sale. Buy a business in distress. Snag good staff wanting to exit a bad employment situation. Note that in weak economic circumstances you may get ex-employees come back to you. Don’t ever re-hire ex-employees. I strongly recommend not doing that. I have just one employee I do that with because she is exceptional and outlier and she never left for the wrong reasons just personal ones out of her control.

Easing stakeholders into it

Have a communication strategy to keep advising on things as they degrade. Let staff know where your industry is at, what the situation is. I update our staff in Retro meeting occasionally as a way of doing this. Uncertainty removed, provides confidence in employees. Let customers know that there might be price volatility or other factors that you know may impact them. Pre-warned reduces the sticker shock when things do change.

Receivables cleanup

Rework how you collect money from customers. Start using recurring statements to collect money. Saasu automates this for business owners. Use computers and automated emails to ask for money, not humans. Humans asking leaves an uncomfortable taste in the customers mouth and is hard for you and your staff to do. It should be a last resort before collections outsourcing.

Inventory cleanup

In the good times when things are humming its easy to get a little loose on inventory management. The business isn’t under pressure. Staff might be writing stuff off that can be fixed or returned to suppliers for credits. Maybe ordering, re-ordering is inefficient. Have you looked at drop shipping versus holding yourself (or the reverse – drop shipping isn’t the holy saviour it once was). Use systems to optimise expected sales versus future orders.

Restructure accounts and payments terms

Are you too accommodating? Do the people who get credit pay the same price as higher value customers who pay upfront. Are you a bank? No. So why do you lend money? If you are letting people delay payment to help their cashflow you are now in two business models, what you do day to day and also a lender to your customers (and thus also exposed by d’facto to the risks in their industry and the lending industry e.g. interest rates)

Seek credit limits

The opposite of this is to get credit from suppliers instead of borrowing on overdraft or short term debt from banks. Some big suppliers can do this. They have such client diversity and large cash stockpiles they will offer this to you. Be careful though that you aren’t swapping a discount for credit lines. A 5% discount for paid upfront is valuable if by having credit for say 3 months you lose this discount. The equivalent interest rate is like borrowing at roughly 20% interest rate per annum.

Why bother?

It is easier to leave this until tomorrow, but that is exactly what the herd does. In business I think there are some key ideas that relate to this that can make a difference:

Saying No is essential for success – many of the above items are about saying no, stopping things.

Decisions, not conditions, shape success – things might get bad but good pre-emptive strike types of decisions will help mitigate some risk and loss where market conditions (not a factor your control) might be about to work against you.

Action is the Goddess of good luckas George S. Clason would say – most of the above require action and that action is what swings the odds in your favour.

Photo by Pawel Czerwinski

Categories: Strategy

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