Five ways a business can build resilience to an economic storm

Business leaders need to build resilience to survive an economic storm. Photo / Andrew Warner

Stubbornly high inflation and rising interest rates are tipping us closer to that ugly “R” word - recession.

And although economic indicators are pointing to tough times ahead, it's an opportunity for business leaders to build resilience to survive downturns.

On Tompkins Wake's new podcast, Off the Clock, Tompkins Wake commercial partner Bryce Davey, Deloitte partner Jono Peart, and Backdoor managing director Geoff Hutchison shared their five business rules for getting through a recession.

Peart said businesses need to stay ahead of the curve to recognise early warning signs of a downturn, giving them more time to prepare.

"Business decision-makers often rely too heavily on economic data or GDP, but this data is always retrospective, it's always three months after the fact," he said.

"To spot the downturn early on, you need to look at what's coming down your own industry pipeline. Is revenue slowing? Are enquiries down?"

At Backdoor, New Zealand's largest surf, skate and streetwear business, Hutchison said he saw the Global Financial Crisis (GFC) coming by constantly monitoring the factors that drive his business.

"As the GFC started to emerge, we kept a close eye on our daily sales numbers. As a consumer-facing business, that's our first indication that things are starting to turn," he said.

"Other sectors will have different KPIs, but whatever's the lifeblood of your business, monitor and measure it frequently."

Davey added: "If you don't have good information, you won't see the storm coming."

Last week's ugly inflation data has awakened the worst fears of economists - recession.

Topline annual inflation for the September quarter was 7.2 per cent, while non-tradeable (domestic) inflation was up to a record 6.6 per cent - both higher than market expectations.

The Reserve Bank will have to act more aggressively in its lifting of the official cash rate to combat inflation, but in doing so runs the risk of overdoing it.

And economists are forecasting appropriately, with OCR - currently 3 per cent - expected to peak between 4.5 per cent and 5.25 per cent.

In its last Monetary Policy Committee meeting, the Reserve Bank lifted its peak OCR forecast of 3.95 per cent to 4.1 per cent.

New Zealand dodged recession last time around after the economy grew 1.7 per cent in the June quarter.

This was off the back of a 0.2 per cent fall in the March 2022 quarter.

The next quarterly gross domestic product (GDP) figures (for the September quarter) are due out on December 15.

Two consecutive quarters of negative growth will need to be recorded for a recession.

Speaking on Off the Clock, the three experts agreed that scenario planning for an economic downturn was an essential regular exercise for resilient companies.

This involves considering a series of scenarios, ranging from worst-case to best. With three to four scenarios mapped out, businesses can stress-test key business indicators to determine points of weakness.

Identified issues can then become action points for mitigation, they said.

When economic pressures come on, getting supporters on your side early is crucial.

Landlords, suppliers, and banks are just some of the key players who have a vested interest in helping your business grow, they said.

Hutchison said instead of keeping these supporters at arm's length, bring them in early and turn them into a support team.

"When times are tough and cash is becoming a problem, we negotiate with our suppliers, and we do it early. We take the same approach with our bank. If you're upfront and talk early on with these key partners in your business, they tend to respond well, especially when you present them with a plan of how you'll trade through," Hutchison said.

Davey said it was about trust, but cautioned that when working with key partners, it's important to remain realistic with forecasts and plans.

Trust breaks quickly when a business constantly overpromises and under-delivers, he said.

"It's far better to be realistic from the start. If things turn out better than forecast, you'll win more friends and build more trust."

Using a specialist adviser team to help strengthen the overall performance of a company instead of the convenience of bringing in one single adviser can lead to bigger gains.

This was the case for Hutchison and Backdoor during the GFC.

"Rent is a huge cost in our business model, and I wasn't good at negotiating leases. I ended up bringing in a lease negotiator who got us significantly better arrangements. That has made a crucial difference to our growth plans," he said.

Peart added: "Don't have one adviser doing everything. Use different experts who can help with specific aspects of your business."

Lastly, focus on profitability.

All businesses manage costs, but resilient companies focus more of their attention on growth.

For these firms, growth is not measured purely by production or revenues, but by improved profitability.

"Hundred per cent margin will get you through in times of volatility," Peart said.

"If you have margin to play with in terms of price range, you have more flexibility to ride out a storm. But if you've got tight margins, the smallest thing can tip you over."

• Find out more, subscribe and listen to Tompkins Wake’s Off the Clock podcast here.