Recession planning: how to bulletproof your business
10 ways to beat the economic downturn
The scaremongers are out in force, and words such as ‘recession’ and ‘downturn’ are being recklessly bandied about. Through the sage advice of those who recall harder times, we provide some proverbial armour to help your business weather the storm
Unless you were involved in the dotcom boom and bust era, you will have to look back to the recession of the early 1990s to recall an economic downturn – so you might not have experienced one at all.
Thankfully, things are rather different since the days when the pound was pegged to a strong Deutschmark, while the country screamed out for a cut in interest rates.
The Exchange Rate Mechanism is dust, the Bank of England independent and the UK’s property market has become a stalwart of the economy. Also, hopefully, we have learned something about economics and business planning since those dark days.
Get on top of cashflow
You have heard this before, and you know it’s true: “Cashflow is the killer of small businesses.”
And only through regular finance meetings (at least once a month) can you really get to understand your cashflow.
“Recession taught me how to be an accountant,” says Felix Velarde, managing director of Underwired, who ran a number of digital agencies prior to and through the dotcom era.
“Now I always have contingency plans for everything. I look at cashflow every day and have financial meetings twice a week.”
There are many ways to improve cashflow, such as leasing instead of buying, negotiating new terms with suppliers, chasing outstanding debts, etc. And, of course, cashflow is tied to profit that can be boosted in three ways: more sales, higher prices and lower costs – all of which are still possible in a recession. But first of all, know your own figures.
Build-in flexi bility
“Businesses that survive downturns all have a sufficient level of flexibility built in – making every single possible cost variable,” says Alysoun Stewart of Grant Thornton.
If your business plan was formed when times were good, it will need to change. Avoid commitment to fixed long-term costs or splashing out on large items. Also, review your main costs and consider alternatives.
“Check staff contracts, cut better deals with your suppliers and talk to your bank,” suggests Andrew Ball of accountancy firm haysmacintyre. If things get harder, you need to be able to make changes, and the more options you have the better.
Adapt your offering
Think about how you have been making money over the last 12 months and question if you will be able to do that in the future.
If your business is based on big projects or ‘luxury’ services, then you are likely to feel the pinch. Steve Leach, chief executive of Bigmouthmedia, recalls the dotcom era ending: “Budgets tighten, financial controls become more rigorous and you suddenly find clients demanding extra value for their money.”
Also, look carefully at your current client list and consider how strong it is likely to be over the next 12 months. Regular buyers might become less frequent and good payers can turn bad.
“Any business might seem like good business when customers are thin on the ground, but if one of them goes to the wall owing you a lot of money, then they could drag you down with them,” advises Leach.
“We tend to focus on the major brands to alleviate the risk of customers going out of business. However, when you’re dealing with small firms and start-ups, it is important to consider their track-record and weigh up their prospects carefully before deciding on their credit level.”
Talk to the banks
“I have always said that the best time to see your bank manager is when you don’t need them, not when you do,” says Colin Mills of the FD Centre.
Banks dislike surprises and won’t be rushed, so even if you are feeling flush it is a good time to start discussing your business with your bank.
“If you haven’t bothered to provide them with information on the business during the good times, then it will be harder for you than for someone who has been playing the game,” warns Mills. Financial institutions are conservative beasts by nature and need time to get used to ideas. Furthermore, sources in the finance industry have told Growing Business that factoring and invoice finance providers are already using more robust methods of risk management planning when vetting firms.
So the message is clear: get out there and keep talking while there is still time.
Pursue your debts
This might be a tough time for some of your clients and you might have to be a little more choosy when accepting business. However, if you feel that you can’t turn the business away, then build in some safeguards. Check your terms and conditions are clear and legal, and ensure your credit control team is doing its job. But also be prepared to see things from your client’s point of view.
Tony Hayday, chief executive of the Software Bureau, ran mail company DPS during the early 1990s and recommends a case-by-case approach when chasing debtors. “We adapted to each individual debtor on an individual basis, but we always insisted on dialogue,” he says.
“I think it is better to be talking to people and trying to understand their situation rather than sending threatening letters, which can have an adverse effect.”
But if things do get to the point where you are no longer interested in dealing with a company, legal recourse shouldn’t be ruled out. Provided there is no dispute over whether or not they owe you money, there are provisions under the Insolvency Act 1986 that could cause a company to be wound up if it failed to pay a debt.
Trim the fat
You need to thoroughly review your business on a regular basis and find ways to cut costs in any case, but with a downturn pending this is even more crucial. Staff are often the biggest cost to a business and this means making some tough calls.
“Check that you haven’t got people that are twiddling their thumbs or that are working on projects that aren’t profitable,” says Velarde. Mills adds that nearly all companies can reduce costs by about 10% if they carry out a thorough review.
Outsourcing is one way to reduce overheads, and the UK already has a strong culture of doing this. Industries such as printing, recruitment, human resources and IT are all regularly used. Also, in tougher economic times there is always a better market for freelancers and temporary workers, so use this for your benefit.
“I think it is a great time to set up a business, as recessions change the order of things whatever the sector you are in,” enthuses Hayday. Indeed, many a fortune has been made during a downturn. Analyse your competition for weaknesses and make this period into a real recession for them by boosting your market share. “If there’s a trade fair or exhibition, then hanging out by the bar is a good way to find out information, but you have to know how to sift it from them,” Hayday suggests.
We would all welcome lower rents and they could be on the way. “We are in a transitional phase, but there hasn’t been a real drop in rents yet,” says Robert Leigh of tenant-focused property firm Devono.
However, he predicts that a downturn in central London is inevitable, as supply will soon rocket. “There are cranes everywhere in the City,” says Leigh. “I recommend that business owners seek flexible contracts and don’t commit to five to 10 years or they will be paying too much rent for half of that time. I am telling people to aim for five to 10 years with a break in the third year.”
You should display a similar lack of sentimentality when dealing with your other suppliers, too. More flexibility can be very beneficial as it aids cashflow, but you should also be expecting to get more bang for your buck – like your own clients could be demanding.
Try to sell your way through it
Don’t start taking resources away from advertising or marketing budgets, or try to save money by reducing sales commissions. On the contrary, this is the time to be really focusing on bringing in the business. “The business way out is to sell your way out,” affirms Hayday. “Don’t take money out of your marketing and sales budget – now is the time to beef it up.”
Kristin Syltevik, founder of technology public relations firm Hotwire, began just before the dotcom bubble burst. She had to refocus on who her market was, and then work hard, but felt that she benefited by being a small business.
“Small companies are more agile than larger business, which are like super tankers – it takes them a long time to change direction,” she says.
Also, in a period when clients are demanding value for money, Syltevik reckons being the boss can help when trying to win business. “You have your reputation on the line,” she says.
“We focused our own message on performance and our clients knew they would be getting someone senior working on their account.”
Acquisitions are always a risk, but downturns bring some tantalising offers on to the market. However, Stewart warns against taking advantage of opportunistic deals.
“I would say that now is not the time to be taking risks with your business,” he cautions. “Focus on your core competencies and don’t be distracted by picking up acquisitions on the cheap. “If that is a key part of your strategy, fine, but if it’s going to divert attention away from your core business, then don’t do it.”
However, Mills disagrees. “If you carry out sufficient due diligence, know what you are buying and why, then why not take advantage of lower prices?” he says.
David Soskin, chief executive of Cheapflights, was the head of Asquith House, a pre-school nursery business, during the recession of the 1990s. The business was dependent on finding suitable properties that could be used as nurseries, and when the property market began to drop he saw his chance. However, his venture capital (VC) backers turned out to be less than enthusiastic.
“I had tremendous rows with the VCs, because I wanted to start buying,” recalls Soskin. “But they couldn’t see beyond the next six months. You find this during downturns – there is a herd instinct, and people can’t see the big picture.”
The two warring factions forced each other into stalemate and Soskin is still rueful that he wasn’t able to take advantage as much as he could.
Bond with your team
Never forget your team and be aware that tough economic conditions make staff nervous. They have mortgages and rents to pay, and people can get very emotional if they think their future is in jeopardy.
Remember, it has been many years since there was a real downturn, so many won’t have experienced one before. You are by no means a charity, but use this time to develop loyalty from your best staff – after all they are relying on you just as much as you are on them.
Syltevik took her staff on a big day out to the Somerset country club Babington House during the summer of 2001 as a thank you for their hard work.
“You need your team behind you,” she stresses. “It is incredible what you can do when you’re motivated. When you are all working outside of your comfort zone, you can become very close as a team.”