In business you need to be constantly watching the horizon as it's inevitable the market you're serving will change at some point, whether that's through government policy changes, technological changes, changes in trends or simply changes in people's needs. It's therefore super important to continually ‘tune’ your business to the market. If the market has undergone a fundamental change, you may need a significant restructure — and quickly — to preserve capital so that you live to play another day.

Market adaptability

There's an old saying: ‘Hire slow and fire fast’. Take the time to find the right people to create the culture you're after in your business (this should be a higher priority than skills alone). With people who are passionate about the business and its mission you'll be in a much stronger position to weather any storm. These people will pitch in to cover more of the load in difficult times. And it goes both ways: make sure you support your team when times are good as well.

Nevertheless, if the market undergoes a fundamental change, you may need to cut staff fast. This is an incredibly difficult task for entrepreneurs, who will likely have become very close to their team members and will always fight to save their jobs — sometimes at the detriment of the entire business.

Demonstrating market adaptability to your bankers will give them confidence in you, and they, in turn, will be more likely to provide temporary financial flexibility if you are seen to be making necessary changes. Banks work on financial ratios and caveats and there's no disguising your performance when things go wrong, so it's much better to be on the front foot, make the call and demonstrate how you'll adapt to the situation.

Rapidly changing market conditions

Depending on the market you're in, market conditions can change rapidly and be totally out of your control. Many industries are subject to government policy of the time and subsequent interference when those policies change. A market may be incentivised at one point in time and those incentives may disappear just as quickly. General market changes — such as when the Reserve Bank decides to change interest rates, for example — may have an immediate impact on the property market.

Continually asking yourself ‘What if?’ is very good practice, and having a plan to meet unforeseen externalities will give your business an extra layer of resilience. In addition to the more predictable changes, we have also seen the full force of nature in recent years, including bushfires, floods, droughts and, most recently, a pandemic, so there are a lot of what ifs to consider! Mass cyber-attacks and geopolitical fallouts with traditional trading partners can also prompt us to pose the question of whether we have too many eggs in one basket or market. As our traditional market ages and their needs change, new competitors and new technology are always a big threat. Your product could become redundant over time, so thinking ahead, foreseeing potential issues and having a plan to future-proof your business is absolutely critical.

If your company's profitability drops (either suddenly or over a relatively short period of time) as a result of a market event or externality, it can significantly affect your business's valuation (which is directly linked to profitability and the number of customers/subscribers in most cases). When valuations change, it may affect your capacity to borrow, and banks loans can be called in, impacting dramatically on businesses that are supported by those borrowings.

It's always of great importance to have an emergency plan for running the business under changed conditions, and for how you would quickly restructure to meet those changed market conditions. You will need to be clear in your own mind about which staff are critical to retain, ensuring sales continue to be supported as much as possible, what work you and your core staff can possibly cover and what services could be temporarily outsourced while maintaining the core operating function.

Re-budgeting and re-planning in detail is essential at this point in time. To ensure you don't run out of cash, spend time with your accountant and go over and over the numbers until you're both confident that the business is recoverable and sustainable. Then you need to re-work the plan to grow the business from this new base and the new market conditions to once again ensure long-term sustainable success and the opportunity to exit.

If you need to wind things up

For some, new market conditions will undermine the viability of the business and there will be no option but to make the call to close the business. If this is the case, it needs to be done quickly and cleanly with all liabilities met while you have the cash available to meet them. Sit down with your accountant and calculate all staff entitlements and company liabilities, including suppliers to be paid and customers to collect money from. Then map out a process for closing down, informing staff and liquidating assets.

Again, if things are done quickly and properly you have a chance of getting back on your feet and preserving assets and your reputation. No-one will blame you for having a go. It's a fact that, unfortunately, market conditions change. If suppliers and customers have been managed professionally and all debts settled, then you're good to try again. If you go down in a burning mess, taking suppliers' money, the bank's money and business partners with you, it becomes so much harder to recover your reputation and start again at a later time, and financially it will take so much longer to recover.

Managing externalities

Insurances play a key role in managing externalities and surviving unpredictable events. For example:

• ‘key person’ insurance: in the event of your death or illness (or that of a business partner)
• professional indemnity insurance: protection if you're providing professional advice
• product insurance (product faults)
• public liability insurance.

Most insurance companies these days offer a business package where these key insurances can be bundled together at an affordable price and tailored to suit your business.

If the externality affects the entire market, the way you react, pivot and re-define your business and take advantage of the new market conditions may enable you to suddenly emerge as the new market leader. Those businesses that successfully use these situations to their advantage are the ones that have most likely already thought through the scenario and are prepared.

The bottom line is (yes, I'll say it again): if you run out of cash it's ‘game over’ … so make every effort to keep your business efficient and adaptable, and plan for externalities.