Anupam Satyasheel, CEO, founded Occams Advisory in 2012. Prior to founding Occams, Anupam spent over half a decade on Wall Street.
We’ve seen it happen before. Potential slowdowns in the economy worry investors, leading them to be more cautious with their money. But in an economic downturn, funding can be the difference between sinking or floating during the rough patches.
Throughout my years in the field, I’ve noticed how capital efficiency can work as a solution to this problem. Particularly in an economic downturn, maintaining superior capital efficiency is crucial for small- and medium-sized businesses (SMBs) to survive and possibly thrive.
Why is capital efficiency so successful? It puts the power back in the SMB’s hands. This is critical during economic downturns and enables SMBs to enhance their capital efficiency through several strategic measures. As the World Bank projects slowed global growth for the third year in a row (download required) fueled by rising inflation, high interest rates and declining trade, economists are split over whether the U.S. will experience a recession or a soft landing this year.
Either way, I believe that businesses should take proactive measures to protect their capital now and in the future. Here are 10 strategies that SMBs can consider as we anticipate tougher economic times in 2024.
1. Optimize cash flow management. Since SMBs don’t have massive reserves like their larger competitors, they must have a precise understanding of their cash inflows and outflows. Insisting on implementing strict accounts receivable and payable policies can help effectively manage cash flow. I think that forecasting tools can also provide critical insights into future cash positions, enabling better decision-making down the line.
2. Enhance operational efficiency. SMBs can emphasize operational efficiency by streamlining processes and reducing costs, all with making sure to not compromise on quality. This includes automation of repetitive tasks and identifying essential versus non-essential expenses. An astute business will frequently review expenses and eliminate non-essential spending. Key steps include renegotiating contracts, reducing discretionary expenses and postponing non-critical projects.
3. Focus on core competencies. Identifying and focusing on the products or services that generate the most revenue can help SMBs optimize their resources and investments, ensuring every dollar spent contributes directly to the business’s core strengths and customer needs. While it is important to broaden the customer base and explore new markets to reduce dependence on a single market segment, diversification—expanding service offerings or adapting existing ones to new markets or audiences—must be done in a staged and well-planned manner.
4. Leverage technology for efficiency. AI has made it easier than ever to access and invest in technology that automates processes and reduces labor costs. Technologies such as large language models (LLMs), cloud computing, generative AI tools and business management software can streamline operations and improve productivity.
5. Implement adaptive business models. My company encourages adaptive and flexible business models that can swiftly respond to market changes. To achieve this, SMBs can explore new markets, adjust product or service offerings and consider innovative pricing strategies to retain customers and maintain cash flow during economic downturns.
6. Monitor market trends and adapt. Being agile and responsive to market changes can allow SMBs to pivot or adapt their business models according to emerging trends and customer demands, potentially opening up new revenue streams.
7. Enhance supply chain resilience. Reduce the risk of disruptions by strengthening relationships with key suppliers and diversifying supply sources. SMBs can also renegotiate terms to improve payment schedules or costs. Additionally, efficient inventory management ensures capital is not unnecessarily tied up in unsold stock. Managing inventory through options like just-in-time and dropshipping can further help reduce storage costs and minimize the risk of inventory obsolescence.
8. Explore alternative financing options. As touched in earlier, traditional bank loans may be harder to come by in a downturn. Exploring alternative options such as client advances, discounts for prompt payment, invoice financing, longer supplier credit terms (even if it means slightly higher price) and crowdfunding can provide necessary capital without the need for substantial collateral.
9. Invest in employee training and retention. Replacing employees is an expensive process that uses valuable time and resources to hire, onboard and train a new employee. During downturns, retaining and investing in training for key employees can be more cost-effective than the cycle of hiring and layoffs. Overall, trained employees can operate more efficiently, contributing to better capital efficiency.
10. Deploy a regenerative investment philosophy. A regenerative investment philosophy emphasizes sustainability and long-term value creation over short-term gains. I recommend this approach because it encourages businesses to invest in initiatives that not only provide financial returns but also contribute positively to the community and the environment, helping build resilience against economic downturns. It also puts a premium on recycling resources.
As a one-stop shop for business, financial and professional services, these strategies fuel the philosophy behind my company and its employees. I believe that using these tactics helps empower SMBs not only to survive but thrive during economic downturns. The key is maintaining a focus on smart, strategic decisions that align with long-term goals and efficient capital use.
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