KEY POINTS:
Graham Foster, international business consultant, advises
companies on surviving the recession.
What is the scenario for business in New Zealand for this and next year?
The economy expanded 3.1 per cent in 2007 but growth in the year ending March 31, 2009, is forecast at +0.3 per cent, the weakest in 10 years. Drought, the higher cost of credit, fuel prices and the housing slump have slowed the economy. The International Monetary Fund says world economic growth this year is down from +5 per cent to +4.1 per cent, and +3.9 per cent for next year. The American economy is faltering and there is fallout in most parts of the world. The New Zealand dollar has been predicted to fall to US$0.58 by March next year.
How long do recessions normally last?
A recession is two quarters, or six months of negative economic growth. Most economies pause to catch their breath, which on average lasts 18 months. The longest downturn lasted 43 months (the Great Depression).
What do we need to know to survive?
Cut costs not prices, and focus on margins and cash flow. Remember mark-up is not margin - if you add 20 per cent to the cost of something, you make a 16.7 per cent margin. A price increase is the most powerful strategy to improve the bottom line. In tight times you may not get price increases easily and you are faced with reducing your costs (mainly fixed costs) to help the bottom line.
What management actions change in a recession? How should I handle my staff?
For a recession monitor margins daily. Check the margins by supplier, product group, sales person and branch location. Take action when you spot margin leaks. Manage credit customers more tightly. Revise all discounts, making them selective and narrowly applied, even remove them. Retrain sales staff who cannot sell benefits and value, and keep them motivated. Beware of mates rates, a killer in a recession. Call a conference of senior managers to get everyone on the same page. Stay focused on customers not suppliers as your margin source. Increase security on all your stock and inventory. Theft increases in a downturn.
What are reasons for price increases in 2008/09? Are there price/profit preservation principles?
Reasons include currency revaluations against the American dollar, oil prices over the past four years rising from $28 to $147 per barrel, higher insurance, compliance and raw material costs (steel, rubber, metals), and inflation. Increase prices if demand is still strong and take advantage of industry peaks and troughs. If you need a price increase, a 5 per cent increase equals a 4.7 per cent margin.
Graham Foster will be speaking at The Knowledge Gym on October 14 in Christchurch, October 15 in Auckland, and October 16 in Wellington.