SMEs should stop fretting about macroeconomic risks
Updated: Aug 25, 2021
Recession, inflation, pandemic, bubble, crisis – disaster after disaster. It might feel that we operate in world where the next major economic calamity is lurking just round the corner.
The good news is that you don’t need a PhD in economics to protect your business from macro risks - in fact, you are better off without one.
A great trick that we use as investors to understand the risk profile of a company is thinking about which parts may be at risk from factors beyond your control. As a business owner you should ask yourself: if you were to buy your business today, what are these factors?
Here are what we think the 3 keys macroeconomic risks are today and how you can prepare for them:
Inflation: this is a sustained increase in price levels. As a business, you will face this on two fronts – the cost of goods from your suppliers and the need to raise the rates charged to your own clients. Delivering value for your customers and maintaining collaborative relationships with high quality suppliers will be important should you need hold price related conversations with these stakeholders.
Recession: a recession is a downturn in economic growth and the business cycle. There is a risk that your business sees a downturn in sales and margins are pushed as customers either leave or spend less. It is important to be mindful of your customer base to prepare for this. For example, consumer facing businesses will do less well in a recession than financial clients. Keeping a diversified client group will reduce your exposure to business cycles and result in reduced fluctuations in revenue.
Labour shortage: an economy may face a shortage of skilled workers resulting in higher wage costs for your business and difficult attracting the right talent. As a business owner you can do a lot to mitigate this risk – building a great culture will attract and retain employees while aligning workers’ compensation (for example through share options) is also important. Finally, you can consider outsourcing or offshoring part of your workforce to an economy with cheaper labour costs.
Ultimately, our view is that businesses which provide an important service to the customer, with a strong team and great culture, can weather any storm and come out stronger on the other side. For us, this is what makes SMEs great and is why we are so excited to be able to help them along their journeys.