Small Businesses in Times of Economic Crisis

Mon, 12 Jul 2010

Can SMEs only pray that the effects of monetary and fiscal policy do the trick? An overview of proactive behaviour

The financial crisis has weighed heavily on all companies, but especially SMEs suffered from shortages of market liquidity. With inter-bank confidence crumbling slowly, commercial banks were afraid to lend among each other, triggering de facto penury of money in the system, which in return affected directly everyday business of companies and went as far as to endanger their existence. Given that 99 percent of all businesses in the European Union are small and medium sized businesses, it is crucial to ensure their survival.

With the biggest challenge largely behind them, the question remains what small businesses can do in a moment of financial crisis. Are they doomed to wait for governmental measures? In other words, are all remedies of monetary and fiscal character, or is there actually something companies can do?

To answer this question, it needs to be said that the possibilities are indeed limited. But no company should place its fate entirely into the hands of state actors. There are actually ways that can help small businesses to remain solvent, which do not only involve firing staff.

What small businesses can do to counter an economic crisis?

First, businesses should focus on accumulating substantial leverage in dealing with money flows. This implies that they should not solely rely on short-term debts for current expenses, but concentrate on a more sustainable long-term perspective. This is why financial reserves are crucial and can decide about the ultimate survival of the company. However, it is well known that the willingness to keep reserves and focus on long-term investments depends entirely upon the culture of payment present in a country. Notwithstanding, all companies – small or big – should have learned their lesson from the liquidity problems caused by the financial crisis and re-think their position and attitude towards debts and expenses.

Furthermore, it is crucial to ensure more efficient payment schemes – whether by pre-payment and commitment or by imposing clear payment periods to their customers, small businesses should not allow for any delays in payments. This is, however, intimately linked to contractual and commercial law in the different countries. Businesses that deal directly with consumers can influence the payment behaviour more, whereas producers and middle men are dependent on laws regulating late payments between retailers and producers for example. Nonetheless, small businesses should use this niche to have a say at payments as much as possible.

When nothing else works: creativity and radical measures

Ultimately, if the above-mentioned efforts turn out to be inefficient, small businesses might need to get a bit more inventive and look first into possibilities to reduce costs, while coupling this with good marketing. Downsizing the production line or decreasing costs of services such as insurance might help. In the long run, a look at switching the company’s location could lower tax payments and renting fees for example. In terms of marketing, selling the produced goods at particularly attractive prizes or package deals – and thus showing solidarity with the equally affected consumers – could boost demand in the short run.

However, sometimes only drastic and less pleasant measures might help. Downsizing staff or stopping production – at least temporarily – are last-term remedies only. Again, the effectiveness of these measures entirely depends on the nature and the size of the business. If a small business is a local and customer-close endeavour, other factors such as customer service might prove to be crucial as well.

In any case, businesses – in good and bad economic times – need to keep the essentials in mind. Ultimately, monetary and fiscal measures of governments help the most. But despite quantitative easing or decreasing reserve requirements for banks, the economy needs time to adjust. And it is exactly during these months of market uncertainty and money shortage that proactive behaviour of businesses is indispensable to remain solvent. Relying on governments and praying for a positive outcome can work, but independent acting and thinking might ultimately save small businesses quicker than heads of government can pronounce “expansionary economic policy”.

by Roxane Schwandt