Last Updated on April 20, 2026 by Jason Andrew
Let’s be honest, the last few years have taught business owners one thing above all else: conditions can change fast.
Between persistent inflation, higher interest rates, rising wage pressure, supply chain disruption and softer consumer spending, many businesses are starting to feel the squeeze. Customers are taking longer to make decisions, sales cycles are stretching out, and discretionary spending is slowing across multiple industries.
For some businesses, particularly in retail and eCommerce, the effects are already showing up in lower revenue and tighter margins. For others, the warning signs are more subtle, slower payments, customers reducing spend, or increasing pressure on cash flow.
The important thing is not to panic.
Panicking leads to reactive decisions. Preparation leads to smart ones.
The businesses that survive downturns are usually not the ones with the biggest teams or the fastest growth. They are the ones that understand their numbers, manage cash carefully and make rational decisions early.
Right now, there are a few additional pressures businesses need to watch closely.
Higher interest rates mean debt is more expensive, so businesses with loans, overdrafts or variable rate facilities should be modelling what higher repayments could do to cash flow.
At the same time, the Australian Taxation Office has significantly ramped up debt collection activity. Many businesses that deferred tax payments over recent years are now finding themselves under pressure to catch up. If you have ATO debt, now is the time to get on the front foot and build a repayment strategy before it becomes a bigger problem.
With potentially difficult conditions ahead, here’s how you can strengthen your business and prepare for whatever comes next.
In this article
- Scenario plan with a three-way financial model
- Improve your working capital management
- Restructure costs and rightsize
Scenario plan with a three-way financial model
When life gets you down, the first step is to organise a three-way, a three-way financial model, that is.
A three-way financial model is used for budgeting and planning. It combines your profit and loss, balance sheet and cash flow forecast into one integrated model so you can see how your business might perform under different scenarios.
It is commonly used for:
- Strategic budgeting
- Scenario analysis
- Understanding cash flow gaps
- Capital raising
- Debt planning and covenant management
Because the three statements are linked, you can see how changes in one area of the business affect everything else.
In this case, we want to model three scenarios:
- A modest downturn, 15 per cent decline in revenue
- A more severe recession, 25 per cent decline in revenue
- A depression scenario, 50 per cent decline in revenue
This gives you a framework for making decisions around:
- Restructuring operating costs
- Pricing decisions
- Cash flow gaps and access to capital
- Staffing levels
- Debt repayments and working capital requirements
This type of matrix can help you visualise how different revenue scenarios and cost reduction strategies affect your cash runway, profitability and overall business position.
The purpose of this exercise is to prepare for the worst.
If your business lost 50 per cent of its revenue, what costs would you cut? How much cash runway would you have? What would happen to your debt repayments? Would you still be profitable?
A good model helps you identify which levers you can pull to improve profit, return to breakeven or protect cash.
Watch our demo below on building a three-way financial model:
It takes a bit of skill to build a proper three-way model. You need strong Excel skills, a good understanding of accounting and enough industry knowledge to know how the inputs affect each other.
With a three-way financial model, you can map out exactly how you would respond to each scenario. That way, if one of those scenarios happens, you are prepared rather than making rushed decisions under pressure.
Improve your working capital management
As every business owner knows, just because you are making a profit does not mean you are flush with cash.
For most businesses, cash is tied up in working capital.
Working capital generally falls into three main categories:
- Accounts receivable
- Inventory
- Accounts payable
Start by looking at your cash conversion cycle.
This is a simple metric that measures how long it takes to convert profit into cash.
The formula looks like this:
Cash Conversion Cycle = Accounts Receivable Days + Inventory Days – Accounts Payable Days
The cash conversion cycle is like golf, the lower the number, the better.
Accounts receivable days
Start by doing a risk assessment of your customers and their ability to pay.
If you have customers with overdue invoices, pick up the phone and have the conversation early. If you know they are struggling, consider offering a payment plan and setting up a small direct debit arrangement.
It is important to rank customers by credit risk and be selective about who you extend favourable payment terms to.
You should also review your contracts and terms of trade. Make sure you have strong termination clauses, notice periods and payment protections in place.
Customers may reduce spend or cancel services during a downturn. The more notice you have, the more time you have to prepare.
Inventory days
You have probably heard of the 80/20 rule, also known as the Pareto Principle.
In retail, it often means that a small percentage of your products drive the majority of your profit.
Rank your products into four categories:
- High volume, high margin
- High volume, low margin
- Low volume, high margin
- Low volume, low margin
Products in the low volume, low margin category are usually the first place to look for cost savings.
Discount slow-moving stock, free up shelf space and focus on reordering the products that actually contribute to profit and cash flow.
The same principle applies in service businesses.
Focus on your most profitable clients and services. If certain customers consistently consume time, create complexity and generate little profit, it may be time to let them go.
Accounts payable days
While you want to reduce accounts receivable days and inventory days, you generally want to increase accounts payable days.
Lean on your suppliers where appropriate.
Start with larger suppliers that are more financially stable and ask whether they can extend your payment terms.
If you normally have 14 days to pay, ask for 30.
You can also have conversations with landlords, lenders and financiers about temporary repayment relief, rent deferrals or interest-only periods if needed.
The key is to communicate early. Most creditors would rather work with you than be surprised.
Remember, your accounts payable are someone else’s accounts receivable, so you can expect to be on both sides of these conversations.
Restructure costs and rightsize
When times get tough, some businesses will need to cut costs and reduce headcount.
These are difficult decisions, which is exactly why you should plan for them in advance and approach them rationally.
It can be helpful to think about cost cutting in three categories: fat, muscle and bone.
Cutting fat
This is the easiest place to start.
Fat costs are the nice-to-haves, the expenses you accumulated during good times that no longer make sense.
Examples include:
- Unprofitable products or customers
- Unused software subscriptions and SaaS tools
- Excess travel
- Meals, entertainment and non-essential allowances
- Excess office space
- Duplicate systems and software
This is often where businesses can free up cash quickly without materially damaging the business.
Cutting muscle
These are cuts that will hurt in the short term but can be rebuilt later.
Examples include:
- Paid marketing and advertising
- Business development activity
- Pausing non-essential projects
- Slowing recruitment
- Delaying expansion plans
Some businesses can afford to cut marketing spend temporarily. Others cannot.
For example, many eCommerce businesses rely heavily on paid advertising to drive sales, so reducing spend too aggressively may create more problems than it solves.
The key is to understand what activities generate return and what activities are simply consuming cash.
Cutting bone
These are the cuts that damage the long-term strength of the business.
We are largely talking about layoffs and downsizing here.
There are generally three approaches:
- Make one major cut upfront and rebuild later.
- Trim the team gradually based on cash flow needs.
- Keep the team together but reduce hours, salaries or both.
The first option can be less disruptive in the long run because it creates certainty.
The second option is the most common, but it can damage morale if employees feel like they are constantly waiting to find out who is next.
The third option can work surprisingly well if your team understands the situation and wants to help the business survive.
This might involve moving to a four-day week, temporarily reducing salaries or offering equity as part of the solution.
Regardless of which approach you take, communication is critical.
Do not leave people guessing.
If there are difficult decisions coming, communicate early and often. People can usually handle bad news better than uncertainty.
It is worth noting that changes to an employee’s hours or pay generally require their agreement under Australian employment law. Before making any changes to employment arrangements, seek advice from an HR advisor or employment lawyer.
Final thoughts
Planning for difficult scenarios is never enjoyable, but it is one of the most valuable things you can do as a business owner.
The businesses that come out strongest after a downturn are usually the ones that acted early, protected cash, focused on profitable customers and made tough decisions before they were forced to.
A downturn does not have to be your downfall.
In many cases, it can be the thing that makes your business leaner, stronger and more resilient.
Want to understand how prepared your business is for a downturn?
👉 Book a call with SBO. We’ll help you assess your cash flow, stress test your numbers and identify the clearest path to protecting profitability and preserving cash.
