Why businesses should learn from the fortunes of Western Australian companies

Following a tough economic run, mainly due to the downturn in the mining industry, Western Australian businesses are now moving towards growth.

They’ve learned lessons about how to maintain the business in tough times and position the business for new growth, and these lessons can benefit all Australian organisations, according to RSM Australia.

Craig Ridley, director, Business Advisory, RSM Australia, said: “The economy moves in cycles that aren’t always as extreme and obvious as boom and bust. Business owners need to keep an eye on what’s happening right now and plan for the future because nothing ever stays the same.

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“For example, demand for products and services dropped dramatically in Western Australia during the mining downturn, with nothing to replace it,” Ridley continued. “The same could happen if there’s a drop-off in construction activity in other states. Without demand, cash flow can dry up quickly, which makes it difficult to service loans on equipment, for example, that no longer earns revenue. At the same time, asset values can fall steeply.

“These types of events can put immense pressure on businesses, so it’s important to be ready for them and have a plan in place.”

RSM Australia recommends businesses take 10 key steps to prepare for a possible downturn:

1. Stress-test cash flows and profit models for ‘what if’ scenarios, and take risk mitigation steps depending on risk tolerance.
2. Build cash or equity reserves to ensure the business’s long-term financial stability, letting it ride the cycles more smoothly.
3. If the cycle is turning, saying no to contract opportunities that require a significant investment in capacity may be difficult but could be the secret to survival.
4. Be prepared to win contracts with little or no margin to maintain market share and operational capacity.
5. Manage workforce capacity flexibly to control costs while maintaining operational capacity.
6. Chase debts diligently to avoid outstanding debts.
7. Where necessary, focus on short-term survival tactics rather than big picture planning but don’t forget to think strategically again when the pressure eases up.
8. Communicate with banks, investors, and creditors as finances become tighter, so payment plans can be negotiated before the business defaults.
9. Put strong financial reporting controls in place to understand all profit drivers with a focus on cash flow management.
10. Consider acquiring undervalued assets and businesses during the downturn to build market share within the target industry.

Ridley added: “Business success depends on careful planning. By putting safety measures in place ahead of any downturn, a business can improve its survival odds. Failing to plan increases the likelihood of the business either failing or being acquired by a larger competitor during a downturn.”