In times of economic downturns, small and medium-sized enterprises (SMEs) are often the last to get paid. With already limited cash flow, a potential recession could spell serious danger for the average SME.
This becomes an issue not only for those businesses, but for enterprises and communities all over the world, because of the integral role SMEs play in the larger economy.
They are responsible for stimulating employment, productivity, and competitiveness in both emerging and developed markets. Their ability to grow is critical to a healthy global economy. In the United States, SMEs account for approximately half of employment and nearly 50% of GDP; four of five new jobs are created by SMEs.
Beyond economic development, SMEs are often the driving force behind culture shifts and innovation. From social media to e-commerce, the greatest entrepreneurial successes are often start-ups that survive long enough to grow at scale.
SMEs are more likely to think outside of traditional business practices and challenge the status quo, tipping the scale in the direction of progress. With such a major role to play in global development, the success of SMEs is crucial. But achieving growth is not easy for them and becomes even harder to achieve when the economy slows.
The good news is that even with a recession looming, there are steps SMEs can take to better protect themselves, their communities, and the larger economic landscape.
Think Twice Before Expanding
A growing SME is good for everyone, but attempting to grow without taking the proper precautions could mean disaster. Expanding too rapidly drains resources and reduces the overall quality of expansion plans.
Before moving into a new region, SMEs must fully understand their market — from demographics and consumption culture to legal systems and government benefit initiatives.
Additionally, it’s important to not underestimate the productivity and creative power of a localized work environment. From product and service offerings to internal processes, adopting the latest innovations and technologies is imperative for SMEs wanting to successfully expand abroad. It bolsters efficiency and improves market-entry speed, an area in which SMEs often lag.
Limit Bad Debt
With complex trading conditions on the rise, debt is becoming more difficult for companies to manage. Growth takes money. Acquiring the amount of money required for growth at scale often means acquiring a certain level of debt.
Carrying bad debt can quickly become burdensome. Not only does it monopolize resources, it can hinder forecasting and the bottom line. By adopting a forward-looking strategy for minimizing debt, potential business opportunities can develop.
SMEs can limit bad debt by implementing standards and terms that are upheld in every customer interaction, including any penalties for late payment. Additionally, they need to proactively decide when it makes financial sense to chase down bad debt.
Finally, relationship building is essential. Know who is paying the bills. Instead of waiting for a bill to become overdue, initiate a transparent dialogue around objectives and issues management.
Choose Customers Carefully
For an SME, it can be tempting to sell to anyone who will buy, but that’s not always the best course to take. We often think of new business in terms of getting new customers to choose us as their goods or services provider, but when it comes to protecting cash flow, it’s also important to choose the right customers.
Ensuring local visibility and knowledge in the long term is key. Call on local partners to gain insight and build relationships. It’s also important to evaluate potential clients using alternative intelligence. Dig beyond their financial ratings and investigate whether their strategy and culture align.
Also consider whether they have risk coverage, like credit insurance, themselves. This usually indicates strong corporate governance, the ability to take smart risks, and an avenue to manage potential exposure. Finally, assess customers’ creditworthiness and define credit limits and payment structure accordingly.
At the end of the day, even the most strategic of precautions won’t change the fact that SMEs are inherently more vulnerable when the economy shrinks. During the 2009 economic crisis, SMEs were the first to suffer. They are also more likely than larger established businesses to seek loans from banks.
That is perhaps why preparation is particularly paramount for these businesses. With the right partners in place and the right steps taken to mitigate risk, even the smallest of players can prevent a crash landing no matter what direction the economy is moving in.
James Daly is president and CEO of Euler Hermes North America, a large provider of trade credit insurance, which helps small businesses make safe sales, expansion, and risk management decisions.