6 strategies to help small businesses innovate post-COVID

Businesswoman scratching her head and thinking about her strategy

Image: Getty Images / Macro VDM

Image: Getty Images / Macro VDM

As Australia emerges from a pandemic-fuelled hibernation unlike any before, many small businesses are blinking into the post-lockdown light, having spent the best part of 2020 scrambling to stay afloat. However, UQ Business and Law experts say there’s still time for small businesses to take stock and innovate.

Throughout a rocky year, small to medium enterprises (SMEs) had to adapt to ever-shifting restrictions and legislative requirements, chasing a constantly moving target of a ‘new normal’.

According to Judo Bank, around 160,000 of Australia’s 2 million small businesses could fold under the strain of the coronavirus crisis, leaving an estimated $40 billion in unproductive debt left on the national balance sheet.

However, businesses with the skills and understanding to craft innovative strategies and leverage initiatives can avoid an insolvency spiral, according to UQ Business School innovation expert Dr Sarel Gronum and UQ School of Law Associate Professor David Morrison.

“Identifying the signs of insolvency and acting quickly is the first important step to avoid a spiral,” says David.

“Once these issues are identified, careful and strategic innovation is the key to recovery and prosperity,” adds Sarel.

These experts recommend six top tips for small businesses to adopt to avoid insolvency post-COVID-19.

Image: Getty Images / andresr

Female waitress wearing a face mask and opening the door for customers during COVID-19

1. Recognise the signs of insolvency

Cash flow issues are important signs a business is on the path to insolvency. David says past cases of insolvency law (regulated by government body ASIC) suggest the following are red flags:

  • Difficulty or inability to pay debts by deadlines.
  • Ceasing communication with stakeholders and creditors including banks and the ATO when debt obligations can’t be met.
  • Recording continual losses.
  • Negotiating deals with critical suppliers for earlier payment to ensure supply while other creditors are left waiting longer to be paid.
  • Inability to produce reconciled accounts to show a true financial position.
  • Erratic payment behaviour including drawing cheques or paying sums electronically in random amounts, usually rounded to tens of dollars; issuing payments that are not honoured; and promising payments but not delivering.
  • Receiving correspondence from creditors’ solicitors, letters of demand or judgement debt.
Restaurant owner closing his business during COVID-19

Image: Getty Images / ClarkandCompany

Image: Getty Images / ClarkandCompany

“Identifying the signs of insolvency and acting quickly is the first important step to avoid a spiral” - Associate Professor David Morrison.

Video: Getty Images / IncrediVFX

Video: Getty Images / IncrediVFX

2. Focus on value instead of discounting

Cash flow issues not only signal a company is not selling enough, but also that they have not built enough profit into margins.

“If this is happening, it means customers don’t care enough about the value the company is providing and the business needs to reassess its value proposition,” Sarel says, adding that many SMEs focus on growing sales rather than improving profitability.

He recommends businesses enhance their perceived value in the marketplace, focusing on higher-margin, premium customer offerings, rather than simply competing on price.

Sarel notes that businesses facing major disruption normally fall into one of two categories:

  1. Those that attempt to mitigate tough conditions by cutting margins and discounting. This can lead to an insolvency spiral as they further discount in an attempt to trade in the same manner without regard for the changed conditions. “They are constantly firefighting rather than looking for new opportunities and testing different approaches,” says Sarel.
  2. Those that use the disruption to test the creation of value propositions in new market areas. They actively look for fresh opportunities and create new efficiencies. He says innovators view the world differently; seeing opportunities for, rather than obstacles to, innovation.
Businesswoman looking through augmented reality googles

Images: Getty Image / Westend61

Businesswoman looking through augmented reality googles

Images: Getty Image / Westend61

3. Leverage government initiatives wisely

With the Federal Government winding back JobKeeper payments, David predicts “insolvency will increase – some struggling business owners have become overly reliant on the scheme.”

Sarel adds, “A smart business will use initiatives such as JobKeeper to retain its core competencies – including staff – and buy time to reassess its current business model to ensure it’s still relevant.”

Sarel warns against trying to merely wait out the crisis, propped up by financial incentives, and encourages businesses to use the time to test different markets and products, increase efficiencies and productivity.

“You cannot ‘wait out the winter’. SMEs need to use this as an opportunity to build in more efficiencies, and even outsource non-core areas.”

4. Invest in technology

Technology is an important area for investment, according to Sarel. “Data is the new oil. A lot of SMEs are starting to invest in mining their data more efficiently to better understand customers and respond to their needs,” he says.

Sarel also singled out the possibility of employing relatively inexpensive augmented reality technologies to value-add to the customer experience, engage new markets and even incentivise staff.

“Augmented reality technology to try on makeup, clothes or even virtually walk through a house is more accessible and affordable to small business than it has been before, and offers a chance to add value to your customers”.

5. Experiment! Fail often, fail fast, but fail cheap

Lean experimentation is the key to successful development and commercialisation of innovations.

“Businesses need to identify a portfolio of opportunities which they continuously test by using minimum viable products. This allows them to gain maximum knowledge from a small investment and enables them to walk away before digging themselves into too big a hole,” Sarel says.

Businesswoman and businessman discussing business plans over a laptop

Image: Getty Images / Filadendron

Receiving legal advice and signing the bottom of the paper

Images: Getty Images / Moyo Studio

Businesswoman and businessman discussing business plans over a laptop

Image: Getty Images / Filadendron

Receiving legal advice and signing the bottom of the paper

Images: Getty Images / Moyo Studio

“The key is to make small bets and avoid overinvesting and over-escalating commitments on large bets. How fast a business moves depends on the nature of the innovation hypotheses to be tested and experiments required.”

According to Sarel, small bets can return big dividends, which is why it pays to “fail often, fail fast, but fail cheap.”

“However, it is important that SMEs, especially when constrained by falling revenues, not cast their innovation net too broadly, focusing instead on testing a small number (two to three) of opportunities at a time.”

Instead of trying to calculate the highly uncertain upside of an innovation, Sarel says businesses should look at the cost associated with testing new ideas and rather ask, ‘what can I afford to lose?’ “It’s important to remember that the first requirement for any product or service innovation is that enough customers want it, that it adds value to their lives.”

In times of recession, a business should increase its innovation activities, says Sarel.

“Studies have shown governments that invest more on innovation during times of recession come out better – and the same goes for business. The true innovators will come out of this period of disruption with a healthier arsenal of income streams.”

6. When in doubt, ask for help

Companies should seek legal advice at the first sign of insolvency rather than try to trade their way out of trouble, cautions David.

“A good indicator that a business needs help comes the moment it cannot pay debts on time,” he says. “Getting expert help as quickly as possible can mitigate the problem and reset a business on the path to profitability and prosperity.”

David recommends:

  • Keeping a comprehensive set of accounts and updating them regularly.
  • Maintaining honest and open lines of communication with banks, the ATO and creditors.
  • Reverting to cash, if possible. Paying for products and services upfront and requiring customers to also pay upfront helps a business keep track of incomings and outgoings and maintain solvency.
  • Reducing overheads by negotiating reduced rent or moving to cheaper premises.
  • Reconsidering workforce requirements and taking on more work as the principal.

Both Sarel and David agree that while this can be a daunting time for small businesses, if they can improve efficiencies, track cash flow and trial lean experimentation, it can also be a great time to increase innovation and be poised for growth.

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