THE natural reaction to an economic shock is to cut back. Whether at home, at work, or nationally, when something goes wrong, the first action is almost always to make cuts. We have saw this in recent history in 2008/2009 with a period of unprecedented austerity following the financial crash and are living through it currently following cost of living, cost of energy and cost of borrowing increases.
The American journalist David Ignatius commented that: “During an economic crisis, what matters is that the government keeps its foot on the accelerator”.
But what does matter to an SME during an economic crisis or shock? Why should small and medium-sized enterprises (SMEs) prepare for that shock in advance, how can they prepare, and what are the key factors to consider?
An economic shock is an unexpected and significant event or situation that disrupts the normal functioning of an economy, leading to significant changes in economic activity, employment, prices, or other key economic indicators. Economic shocks can be caused by a wide range of factors, including natural disasters, financial crises, geopolitical events, pandemics, or sudden changes in government policies.
Over the past few years, we have experienced almost all of these drivers, from Covid-19 to the Russian invasion of the Ukraine, from the Liz Truss premiership and budget; to the complex and compound cost of living/energy/borrowing crisis ongoing.
Looking back the impact of economic shocks can vary depending on the severity and duration of the shock and the resilience of the affected economy. Some economic shocks can be short-lived with a limited impact, whilst others can have long-lasting effects that lead to major structural changes in the economy (the 08/09 crisis and global financial rebuild). In general, economic shocks are characterised by a high degree of uncertainty and unpredictability, making it difficult for policy-makers and businesses to plan and respond effectively.
SMEs are often more vulnerable to economic shocks than larger businesses due to their limited resources, smaller customer base, and more limited access to credit, making it even more important for SMEs to take a proactive approach to mitigating the impact of such shocks.
Economic shocks can have a significant impact on the financial health of SMEs, potentially leading to reduced revenue, increased costs, and cash flow problems. By taking a proactive approach, SMEs can identify potential risks and take steps to reduce their impact, such as diversifying their customer base, reducing costs, or securing additional financing. Practically,
SMEs can utilise saving accounts for upcoming taxes, impending expenses, or just general savings. This means that when an economic shock occurs, the business has adequate cash to provide an immediate contingency to ongoing operations.
It’s not only an impacted SME that may be tempted to reduce its outgoings during an economic shock. Their customers may reduce their spending or switch to cheaper alternatives as well. SMEs that take a proactive approach to mitigating the impact of economic shocks can maintain customer loyalty by adapting their products or services to meet changing needs, communicating proactively with their customers, and building strong relationships.
Not all of the impacts of economic shocks will be negative. Economic shocks can create opportunities for businesses that are able to adapt quickly and respond to changing market conditions. SMEs that take a proactive approach can stay ahead of the competition by innovating, diversifying their product offerings, and investing in new technology.
SME owners and directors need to accept that economic shocks are a regular occurrence. SMEs that take a proactive approach to mitigating their impact will be better prepared for future shocks. By developing contingency plans, building up cash reserves, and diversifying their business, SMEs can minimise the impact of future economic shocks and ensure their long-term sustainability.
Coming back to David Ignatius, he said, “Fear brings out the best in some people and the worst in others. It's a test of character, for individuals and nations”.
I’d add that economic crises are a test of character for a business, challenging its values and behaviours, with only those who have prepared, and take decisive, proactive, positive action likely to truly succeed.
:: Robert McConnell is managing director of Pinnacle Growth Group (https://pinnaclegrowth.group)
