The economic downturn, which caused flat or declining turnovers, shrinking profit margins, and rising overheads, is showing signs of bottoming out as we reach the halfway point of the 2025 financial year. While the past year has been tough for many, there are positive indicators that the tide is beginning to turn.
Flat turnover in tough times
Generally speaking, the year ended 31 March 2024 was marked by a relatively flat or in some instances slightly reduced turnover over the 2023 year for many businesses. With the New Zealand economy in recession, growth opportunities were limited. However, it’s essential to focus on what can still be done to maintain your position and weather the storm.
In these tougher conditions, revisit your goals and assess what you can realistically achieve. Customer retention becomes more critical, and efforts to enhance loyalty through value-added services, targeted marketing, or new product lines can provide stability during uncertain times. The idea is not just to grow but to hold onto what you’ve built so far.
The margin squeeze: Reduced gross profit
The gross margin squeeze has generally continued in 2024. Although falling across the period, this has been exacerbated by continuing inflation and rising costs of goods sold. While businesses tried to adjust prices, many were unable to do so fast enough or sufficiently to preserve their gross margins.
Many businesses still hesitate to pass on higher costs to customers, fearing loss of market share. However, a regular review of pricing strategies and gross profit margins is crucial. Monthly reports should track not just sales but also trends in profit margins. This is where periodic reporting becomes even more important than ever.
Overheads continue to climb
Overhead costs continued to creep upward in 2024. Although it has eased back significantly now, there was evidence of continued wage pressures early in the 2024 financial year. However, as the employment market turns, with power seemingly shifting its way back to the employer, it’ll be interesting to note this metric for the 2025 financial year. Though overall turnover remained flat, rising expenses continued to put a strain on businesses. With less room to grow revenue, keeping costs under control is vital.
Continue to reassess every part of your operation and think about whether technology or process improvements could mitigate these rising costs. Despite the short-term cost pressures, it could position your business to grow more quickly as conditions improve. Could AI or automation help reduce labour intensity in your processes? Decisions should be made cautiously, as cutting costs may sometimes impair your business’ long-term ability to grow as the economy recovers.
A net profit decline
The combination of flat turnover, reduced gross margins, and increasing costs has inevitably led to a decline in overall net profit. With margins squeezed and overheads rising, this outcome is almost inevitable, particularly as the recession bites. However, declining profit doesn’t have to spell disaster if businesses maintain agility in managing cash flow and staying operationally lean.
We’ve seen a significant amount of income tax refunds coming through, especially where provisional tax for 2024 was based on Inland Revenue’s standard uplift calculation from 2023. A sure sign of a depressed year, compared with 2023.
A glimpse of optimism: June 2024 and beyond
Amid the tough conditions enduring for the 2024 financial year, there is now light at the end of the tunnel. June 2024 is being seen by many as the potential bottom of the economic downturn, with the outlook becoming more positive as we move into the second half of the current financial year. This signals that the New Zealand economy could be poised to pull itself out of the recession, with some signs of stabilization already beginning to emerge.
A significant contributor to this improving outlook is the Reserve Bank's well-publicised decision to cut the Official Cash Rate (OCR). The initial cuts have already provided a much-needed boost to general confidence, and projections indicate that the Reserve Bank will continue to ease monetary policy in the coming months, and potentially quite aggressively. These OCR cuts are expected to inject liquidity into the economy, reduce borrowing costs for businesses and households, and stimulate both consumer spending and investment. While there is inevitably a lag in the benefit for those with fix term borrowings, and that flowing through to the wider economy, we’re hopeful things should start heading in a positive direction in the near future.
This monetary stimulus could very well be the catalyst the economy needs to rebound, allowing businesses to regain confidence and move forward with renewed energy. While we are not out of the woods yet, the signs are encouraging, and the worst of the recession may be behind us. The months ahead will be crucial as businesses begin to see the benefits of these policy changes.
It all comes down to cashflow
Now more than ever, cashflow management is the lifeblood of your business. With trading conditions still generally very tough, maintaining a strong cash position becomes critical to survival. There are multiple levers to pull to keep cash flowing:
- Renegotiate payment terms: Both with customers and suppliers, improving your cash conversion cycle can make a critical difference.
- Simplify payments: Make it as easy as possible for customers to pay you, including credit card options and automated payment links.
- Tighten debtor collections: With many businesses struggling, don’t delay addressing late payments. Let accounting software work for you through automated reminders and overdue notices.
- Manage stock efficiently: Clear out aged stock to improve liquidity and reduce carrying costs, even if it means a smaller margin.
- Leverage supplier relationships: Consolidate suppliers and explore better deals to maximize cost savings.
- Utilize debt funding structures: Convert short-term debts into longer-term financing to spread out repayment and ease immediate pressure on cash flow.
The importance of forecasting
One of the most significant risks in this economic environment is failing to forecast cashflow effectively. Forecasting allows businesses to anticipate challenges and prepare solutions in advance, instead of reacting when it’s already too late.
Looking forward
While 2024 began with challenging conditions, which are still present for most, there is growing optimism that the economy is starting to turn the corner. With the Reserve Bank cutting the OCR and more cuts likely on the horizon, the economic environment should become more supportive for growth and recovery. For businesses, this means an opportunity to regroup, focus on resilience, and prepare to capitalize on the recovery when it arrives.
