Recessions can test even the strongest business but they also present opportunities for change and growth.
No one expected covid-19 or could have predicted its impact on the economy. We have seventeen tips that can help your e-Commerce business survive in the short-term and thrive in the long-term.
“Bad companies are destroyed by crisis, good companies survive them, but great companies are improved by them”Andy Grove, CEO of Intel.
Before we get into the tips, it is important to point out that the best change you can make for your business is to align it to your ultimate goals. Surviving and thriving is good but unless your business is getting you closer to your ultimate goals, what are you working for? Here at Insight Matters, we believe that Financial Goals are the key to achieving your ultimate goals. They also take away much of the underlying stress of running your business. Make numbers your friend.
Financial Goals are the tangible financial metrics and milestones that lead you to your ultimate goals. They are unique for every business because every business and its goals are unique. We help you identify your unique Financial Goals and put a system in place to support you. When you focus on the right numbers, everything changes.
Short term survival tips: increase positive cash flow
In the short-term, cash means survival. You may be well capitalized but without liquidity you will drown. Here are some tips to increase your positive cash flow.
1 Reduce excess inventory:
Excess inventory is wasted cash. During a recession you will not need your current levels of inventory so reduce them. Exceptions include businesses whose products have uncertain supply chains or who have products that will sell well during the crisis e.g. masks.
To reduce your inventory successfully, try the following steps.
- Take your sales numbers from the last 12 months and then adjust these for the expected decrease going forward.
- Determine your minimum viable stock level for the new sales numbers.
- Reduce your inventory to the new minimum viable level using discounts if needed to clear excess stock.
If you do not know your minimum viable stock level then calculating it will likely help you reduce your inventory even further. If you are managing your stock ad hoc then your inventory is probably too high.
One common method for calculating the minimum viable stock level is to multiply your maximum expected weekly sales by your maximum lead time for deliveries from your supplier. For example, if your maximum weekly sales are 100 units and your maximum lead time is 4 weeks, then your minimum viable stock level is 400 units (see diagram below).
2 Work with your suppliers to reduce working inventory further:
Another way to reduce your inventory is to ask your suppliers to reduce your Minimum Order Quantity (MOQ) and to speed up lead times. A smaller MOQ will allow you to order more frequently as will faster lead times. This will allow you to reduce your minimum viable stock level further. It of course assumes that your delivery costs are not prohibitive.
The ideal for many companies is a Just-In-Time inventory system. This is when you have reliable and fast suppliers who can ship you supplies just before it is needed. This is however not always possible.
3 Increase your customers’ Average Order Value (AOV):
Provide a discount to customers who order more. This will reduce your margin on each sale but it will also increase turnover and keep inventories moving.
This works best with high value products that are bought less frequently (these are called “Product A” in ABC Analysis). In many businesses, Product A represents 20 percent of sales by number but 80 percent by value (the pareto principle).
You can also try cross-selling products to your customers. Does some of your other products fill other needs they have?
A loyalty program can also provide an incentive.
More restrictive approaches include bundling products and raising minimum order value. These however may offend some customers.
If you can find data on the AOV for your industry then this can tell you if this is an area for improvement in your business. Similarly, do you track your AOV over time? If AOV was higher in the past, can you determine the reasons why? Was your pricing or marketing different?
Talk to your suppliers to see if you can extend out due dates and pay invoices in installments. Your suppliers may not like it but they will much prefer getting paid, albeit more slowly, than not getting paid at all. Remember that in a recession, they will be doing it tough too so negotiate with empathy.
5 Renegotiate loan terms or restructure terms:
Renegotiate any loan payments you have or if possible, restructure your short-term debt to longer-term debt. Like your suppliers, your bank will be willing to help you if it increases the odds that they get more of their money in the long-run.
It is good to be proactive with this rather than going to your bank when you are already struggling. The stronger your position, the greater your options.
6 Kill or pause any expense that does not lead to a positive short-term cash flow:
Kill any pet projects that do not have a positive short-term cash flow. During difficult times, you will need to be ruthless to be efficient. It can be difficult kill pet projects especially if they are not yours but the threat of recession provides a good opportunity to kill them off.
If a project has no short-term gain but a large long-term pay-off then try to pause the investment rather than kill it. Do not sacrifice the future for short-term survival.
7 Take advantage of any government help:
Many countries and levels of government are providing financial assistance to small businesses during the covid-19 crisis. Stay alert to this help by visiting official websites and by talking to your local representatives. Large firms are not shy in taking advantage of government help and neither should you be.
Tips for thriving in the long-term: improving operations and building a better business
While you are increasing your cash in the short term to survive, you also need to think about how to thrive in the long-term when business conditions improve. Anytime is a good time to improve operations or to prepare your business for future opportunities but this is particularly true during a recession and before the next economic boom hits. The following section gives you some key areas to think and rethink about.
8 Rethink your financing:
Debt can drive future growth but if not structured wisely it can also choke future growth.
Are you paying high interest on credit card debt or other short-term debt? You can reduce your interest expense by consolidating those debts into a business loan.
If you are underleveraged and want to borrow to expand your business, talk to a financial advisor about your options or how to best make a pitch to your bank. With historically low interest rates, debt may be a good way to fuel future growth.
9 Rethink your inventory management:
In the first section we looked at how to reduce excess inventory but there are also other strategies to reduce inventory costs.
If you have a good relationship with your supplier and are an important client, they may be willing to store their stock in your warehouse. This would save them warehousing costs and allow you to buy direct from your own warehouse. This reduces lead times to zero while eliminating inventory costs.
If the supplier is reliable, you could also have them deliver direct to the customer rather than to you first. This is known as drop shipping. This carries several risks. You are depending on your supplier for timely delivery of the product as advertised. Second, your supplier, if inclined, could steal your customers. Third, your customers could buy directly from your supplier. You need a good relationship with your supplier for this to work.
Another strategy is to invest in good inventory management software, if you have not already. Good software can provide you with the data to better manage your inventory and to lower your minimum viable stock level. Good inventory management software for eCommerce includes Sellbrite, Ordoro, and Cin7.
10 Improve sales forecasting:
Better sales forecasting can help reduce excess inventory and better identify growth segments in your business. It can also tell you when to stop investing in declining areas of your business. You do not need to wait until the writing is on the wall, forecasting saves you time and money by letting you anticipate the future today.
Big companies have teams dedicated to forecasting but today you can develop good forecasts using sales or inventory management systems.
11 Expand into new products or markets:
Do not settle for success in your current market. Even if you are a market leader in your segment, it is difficult to stay on top. Compare your products and markets to similar products and markets to identify new growth opportunities. Look at your most successful markets. Could you target those same niches in different geographical locations? Or could minor changes to the product or its marketing gain entry into new niches? Whole new markets could be waiting for you.
12 Try a new marketing strategy:
In the age of social media and influencers, advertising has never been so targeted and cost-effective. How is your company advertising? Are you measuring the volume of sales from your different advertising channels? The ability to collect data on customer and potential customers now makes it possible to conduct natural advertising experiments. If you have always been curious about Facebook, YouTube, or TikTok advertising then try it. Any improvement in sales will of course boost revenue but you may also find that you can reduce your advertising budget by being more targeted with your ads.
13 Rethink your product strategy:
It is also important to review your individual products (SKUs) to ensure they are returning a positive gross and net margin. Is revenue covering the cost of the product? Is it covering the cost of indirect expenses like administration expenses and fixed infrastructure costs? SKUs that do not provide a positive net profit margin should be removed or have their margins improved through lower costs or a higher price.
Also consider ABC analysis. Is one product or group of products generating most of your revenue or net profit? Or does one product have a higher gross profit margin? Are your efforts and advertising focused on those products? Can you increase their sales? Can you increase the gross margin on those products?
On the other side, consider discontinuing products that take a lot of your time and effort but have low gross margins or generate a low percentage of your revenue.
14 Keep yourself accountable:
You may have the right Financial Goals in place and have made other good preparations for recession but if you do not stick to your plans then you will not achieve success. We all need discipline to achieve our goals but we do not always put the systems in place to help ourselves.
“It is easy to be successful, but it is easier not to be”. Jim Rohn.
At Insight Matters, we work with owners to build easy-to-follow dashboards that let them track their progress against Financial Goals and other targets. We can also provide personal accountability with regular coaching sessions.
15 Rethink your organization structure:
Over time companies grow and shrink as they respond to demand. But such organic growth does not always result in the most efficient organizational structure. From time to time, you should review your organizational structure to see if it matches your current needs.
Staff and resources should be moved from declining areas of your business to growing areas.
Some work could also be automated or outsourced. AI bots and freelancing platforms have grown in sophistication over the last five years and now provide businesses with lower cost alternatives to some full-time staff or at least some of their current duties. Staff can be reduced or redeployed to more productive activities.
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16 Improve team quality:
In addition to changing your organizational structure your business could also benefit from upgrading staff through training, improving performance, or replacing staff.
No job stays the same so training is essential to ensuring worker and team quality. While formal education remains important, online learning is more flexible and cost effective.
Underperformance hurts your business and ultimately the worker involved. By working with staff, you can increase your productivity and happiness. Often underperformance is caused by poor fit or personal issues. Would the worker be more productive if they were shfited to a different role?
If the cause of underperformance is personal issues then listen to the staff member to see if changes at work could help. But also make they understand your performance expectations.
“The essence of good leadership is holding your people to the highest standard while taking the best possible care of them.” Colin Powell.
If you cannot help your team member to improve, then it may be time for them to leave. This allows them to find work that better matches their skills and allows you to find someone who can create greater value for your company.
17 Re-examine your assumptions on your customers, market, product, and suppliers:
Above all be agile. In this era of lean business models, you should always be paying attention to your data and customer and supplier feedback. And this is doubly true during a recession. Now may be the time to pivot your business or to make a small tweak to the product, target market, etc.
Do you need help in making some of these changes?
Some of these tips are obvious and easy to implement. But for some you may need a little help. An investment in expert help can lead to a big pay-off for your business.
At Insight Matters, we have helped many eCommerce businesses prepare for recession and future opportunities. Talk to the team about how we can help, we are ready to listen.