Global trade conflicts fuelled by strict political rhetoric has produced altering effects on the global trading system, hindering the performance of the economy.
Canada and the United States over the last 6 months have showcased a reduction in GDP growth. Thought employment in the United States in certain economic sectors has increased, other sectors have showcased a reduction in productivity affecting economic production. This growth has also occurred in China and India, with Europe also exhibiting a downwards trend in organic growth. Though each respective nation at the moment are having internal political issues, Economists credit this global decline to contentious trade relations, and reduction in investments. Global M&A activity has also shown a decline, showing us corporations have become more wary of capital heavy expansion.
The IMF as of this month shared that global economic activity would grow by 3%, the lowest forecast provided by the institution since 2009, fresh off the financial crisis. The US Economy is forecasted to grow 2.4% lower than that of July’s 2.6. Canada, is expecting to grow by 1.5%
Canada’s internal economic situation shows diminishing augmentation in growth. Consumer spending has decreased to according to the BDC dropped by 1.6%, business investments weakened to 3.6% and Canadian exports managed to remain at 2.5%, however economists further predict a decrease, due to decreased demand for Canadian exports.
The analysis above showcases a rather bleak situation unfolding in the global economy, reduced trade and investments, do have effects on the aggregate structure of an economy. How can you, an Entrepreneur brace yourself for this economic downturn? Whilst most business owners turn to some form of business financing before and even during a downturn (which can be difficult) there are a few strategies to adopt internally during economic decline.
Improving Internal Operational Efficiencies:
To accurately gauge your current business performance, it is essential to be aware of competing firms and their performance. Utilizing key indicators pertaining to performance such as aggregate sales, total revenues, etc may assist in properly evaluating performance in regards to competitors. It is essential businesses aim to minimize costs, engage in cost-benefit analysis to gauge which assets, products, and operational activities, prove to provide profit. Those which are hurting revenues, or are not as productive should be reconsidered and if necessary dispossessed. Another important activity in regards to internal operations is that inventory is managed properly. It is advised that businesses do not engage in aggressive inventory stock to overcompensate for short term customer needs. This will push costs up, putting pressure on business income, something most business owners don’t wish to do when consumers in the economy have cut back their consumption. This would be even hurtful to businesses if some form of business financing, or other form of financing was utilized to acquire this inventory. Hence careful decision making should be an important practice during economic decline, whether taking a loan or managing inventory.
Overcrowding and Over-processing:
Basic economics shows, too many chefs in the kitchen reduce productivity, as per the the law of diminishing returns. Are all agents, intermediaries, and middlemen essential in your supply chain? This is important to address from an efficiency standpoint. Can leaning out the supply chain assist you in maintaining revenues? It is important that business owners properly assess their supply chain and review the productivity of their suppliers when moving forward during periods of credit crunches and weaker economic activity.
It is also essential that your team and employed personnel are working towards a common goal, all team members must be productive. Carefully overseeing operations, and taking charge as business owner is a must when the economic environment is poor potentially stressing revenues, which would make the distribution of salaries and income an important expense.
Utilize technology such as quickbooks to monitor your expenses and sales, this will be essential practice. It is important to document your performance and monitor activities. Once again, this goes back to efficiency, as the rest of the economy slows down inefficiencies in global supply chains are inevitable. Whilst there may be a slowdown of certain economic sectors, sectors related to your business or even your sector of business, adopting technology and carefully monitoring performance will be a fruitful practice. At the same time, the adoption of technology may prove to be a less costly avenue for increasing sales, and automating some processes online will prove to save time, and potentially lead to sustained or even increased revenues.
Another strategy which would require careful planning, but definitely result in some level of sustained profit during an economic decline is diversifying your customer base. Having a sales concentration on a certain consumer segment of the market, may expose your business to certain sectoral risks and lead to closing yourself from potential revenues. Companies boasting diversified services or products put themselves in a position where they can reach a larger customer base attracting more potential clients, thus increasing revenues. Of course this requires you to properly research market conditions and amass a greater understanding of consumer market demand to make such decisions. Diversifying your customer base should occur with the diversification of your supplier base. This would be essential in avoiding supply chain disruptions, possibly creating economies of scale, and a much higher return on investment on your business activities.
It is essential that debt financing is also secured early. Banks are notorious for cutting down on credit lines and lending activities become tightened amongst major institutions. While it’s important to secure some form of debt financing for sustaining projects, never aim for the higher debt loads. As economic activity slows down, it is imperative businesses manage their debt properly and do not compromise debt serviceability which may hinder their operations in the long run. Debt financing can be an attractive option for increasing working capital, and provide more efficiency in operations. Contractual obligations your business has entered can also be easily conducted with extra financing, which may be imperative for internal returns. However, once again increased debt loads can stress business activity and careful planning and discussions with a lending entity (bank/alternative lender) is important.