Five Lessons From the 2008 Global Economic Crisis That SMEs Should Remember Before Entering 2023
The effects of the 2008 recession were felt for years after, and while governments and financial institutions rolled out various measures to enable economic recovery in 2009, many of the lessons from that time are particularly relevant to us today.
The effects of the 2008 recession were felt for years after, and while governments and financial institutions rolled out various measures to enable economic recovery in 2009, many of the lessons from that time are particularly relevant to us today. As the world faces some of the most unprecedented times of the modern age, these lessons will be more important than ever, particularly for small and medium enterprises (SMEs) that are still standing after the COVID-19 pandemic.
Here are five of the most important lessons from 2009 that SMEs should focus on before welcoming 2023:
1. Have multiple capital sources The economic impact of the pandemic and other recent global events can be felt in many corners of the world. Concerns about recessions, rising commodity prices, and slowed growth can force adjustments in fiscal and monetary policies. This could possibly make it more challenging for SMEs to get funding. This is why it's important to diversify your sources of capital. Credit has its advantages with the right strategy. Borrowing from a single financial institution whenever you need funding can be risky in unstable times. It can also force you into unattractive terms. Diversifying capital sources has a lower cost, and because you have different funding options, you can get friendlier or more flexible terms. This helps your business grow and prepares you better for unforeseen downturns.
2. Keep a healthy cash reserve Acquiring debt is part of any business. As mentioned in the first point, a business should have multiple sources of funding. But having too much debt when economic problems arise can deplete your cash in an instant. This is why cash remains king. During a recession, riding the tumultuous waves depends on your cash reserves. When income is significantly reduced, the business should still be able to pay off debts and other expenses. This is only possible with a healthy cash flow-to-debt ratio. So, when profits are made, businesses need to have a sound debt management strategy, where the priority is to reduce debt to manageable levels that won't put the company at risk even during downturns.
3. Protect accounts receivable The last couple of years have seen many businesses fold, and with them, their payments to their suppliers or customers. For businesses on the other end, losing those receivables can have devastating effects. Insuring your accounts receivables has several benefits. For one, it protects your cash flow in instances where partners or customers are unable to pay what you're owed. It also protects you when your records are lost or damaged, as well as from cancelled import/export permits. And when your receivables are insured, it becomes less risky to accept bigger orders to help drive business growth.
4. Don't turn away from acquisitions When markets are down, especially during recessions, inexperienced business owners can easily fall into a state of panic. However, history already tells us that downturns always happen. So those who panic usually fold and don't survive. On the other hand, those who seize opportunities and adapt to the situation are often the ones who survive. And sometimes they come out with a stronger business than before the economic problems started. It's during this time that consolidating ownership in the market becomes a strategic solution. It's no surprise to see businesses acquire some of the smaller companies to put themselves in a better position for long-term success. Some assets can also be acquired for a lower price tag, which acts as investments that can be part of future plans. As such, business owners shouldn't panic when the market goes down. Instead, be flexible and find opportunities within the chaos.
5. Branch out your customer base SMEs, at the start of their ventures, often enter into long-term partnerships with a few valued clients. While this can bring in consistent revenue that will help the business take off, staying solely on this course puts the company at risk. When relying on only a few customers, there's a real danger of losing those income streams during downturns if those customers lose their business. Just like in investing, having a diverse portfolio in various areas protects you when economic turmoil hits. For SMEs, this means expanding your customer base to different sectors or locations, for instance. Aside from lowering the risk of vulnerability of relying on a few clients, this could also provide new opportunities for your business and grow your brand.
As you prepare your business strategies for 2023, it's important to take into account these lessons from many years ago. With economies in a downturn, SMEs need to prepare for the uncertainties ahead to survive.