Make sure your business is prepared for a recession
As pressure builds in households up and down the UK due to the cost of living, inflation is continuing to rise and is expected to reach 13% by October. In a bid to keep the economy under control, on Thursday 4 August, the Bank of England pushed interest rates up by a further 0.5%. With this latest rise, plus lingering Covid uncertainty, experts and business leaders are bracing themselves for a recession that could last up to 18 months.
A recession can have a devastating impact on both personal finances and business, and although an impending recession isn’t a given, it’s always wise to have plans in place for an uncertain future.
In this article, our Group Managing Director, Scott Heath, explains how you can make sure your business weathers the storm by preparing well in advance.
A recession? What actually is it?
When the economy is in a good position, it’s gross domestic product (GDP) or the value of its goods and services grows, however during a downturn, this value falls.
A recession is declared when the economy contracts and GDP drops for two consecutive financial quarters, but a decline can last longer than this, even years.
Recessions are an unavoidable part of the business cycle, which all organisations will experience at some point in their lifetime, but there are defensive strategies that can be put in place to make sure they come out of the other side.
Don’t batten down the hatches
Like with most things in life, there’s no point burying your head in the sand when a potential recession is looming. You’re better off preparing your business and making it as robust as possible. You may need to make tough decisions along the way, so having a clear plan will make it easier to act.
Your business may not totally emerge unscathed, but careful preparation can ensure its survival or even help it thrive. Here are my eight survival strategies to make sure your business is up for the fight.
1. Keep your costs under control
I’d always recommend a business keeps its costs under control no matter what the state of the economy, but when times get tough you’ve got to know what your business can live without. There are always indulgencies within a business that erode profits without delivering any growth.
Cost lines should be reviewed and your budget trimmed where it makes sense. It’s possible to go too far, so be sensible when you’re making this kind of decision.
2. Know your numbers
Being armed with data is always the best way to tackle any challenge in business. Staying on top of your numbers with regular management accounts will ensure you understand the metrics about the day-to-day operation and key performance indicators (KPIs) on the business performance overall. You should look for trends and stay on top of any price increases, so you adapt accordingly.
3. Manage your debt
When budgets tighten, the pressures of debt intensify, so I’d always advise you to reduce any debt whilst you can, or if not, refinance to find a more favourable interest rate and structure to suit. You can also look to consolidate.
If you have the cash, pay down your debt faster by starting with those that have higher interest rates, moving on to others after they’re cleared. On the other hand, if you know you’re going to need capital in the future, it’s a good idea to secure finance well in advance of needing it. Requesting the debt structure well in advance of needing it shows the funder that you understand the business and its requirements, asking for support last minute adds unnecessary pressures across the board.
It’s not all about managing your own debts though, you need to be hot on when managing those in debt to you too. Cash flow is key, so making sure it’s flowing in to your account smoothly is crucial. You’ll need to have robust credit control procedures in place, which could include Direct Debit payments for those customers who make recurring payments, but good communication and relationships are a great starting point.
4. Cash is king
An accurate cash flow forecast will help you predict the future cash position of your business, understanding exactly what’s coming in and what’s going out during a given period. Cash flow forecasts, along with profit and loss, will allow you to plan and remain in control of costs.
It’s always good to be in a position where you have money in the bank to cover between 6-12 months operating costs, should there be an emergency you’ll be reassured of the backup. Your target savings balance will depend on a number of factors, like the size of your business, revenue, margins and market volatility.
Whilst it’s a fine balance of money sitting in the bank doing nothing and feeling secure, it’s always good to have a healthy emergency back-up.
5. Diversify your business
If a recession hits your customers hard, it will soon hit your business too. If your revenue is dependent on a few customers, particularly in the same sector, you could soon start to have problems.
Don’t put all your eggs in one basket, diversify your customer base. You can do this by targeting new markets, increasing your marketing budget or recruiting a new sales person to attract new customers. Developing new products or service lines can be risky, so I’d recommend that you avoid getting distracted away from your core business. If you do go down this route, make sure you do your research and have a clear plan in place to launch.
6. Carefully manage your stock
You don’t want to have too much cash tied up in stock when a recession lands, as it’s harder to liquidate when you need it.
Always keep your stock lean, only keep stock that you really need to meet the demands of your customers. This isn’t easy with the current holdups in supply chains, but with today’s technology you can use advanced tracking methods to remain agile.
7. Keep on marketing
The marketing budget is generally one of the first items in the budget that you may think to cut back, but I’d suggest you try to shy away from this. If you’re looking to attract new customers, they’re going to have to find out about you some way. The continued building of awareness of about your business, will also give customers confidence.
Make sure you spend wisely, use a targeted and measurable approach and you will see a return on investment to your cashflow.
8. Build great partnerships
Having partners that you can trust is invaluable in business. It’s better to work with companies that want to work with you for the right reasons, rather than just treating your services as a commodity or if they’re a supplier, just taking your money.
When times are hard, these relationships will give you the support you need or even open up new opportunities.
Here to help you navigate the storm
If expert predictions are right, the economy is currently facing the worst downturn since the banking crash in 2008, with GDP shrinking from September for more than a year.
If you’d like a little help putting plans in place to prepare your business for what may lie ahead, get in touch with us here at DJH Mitten Clarke and we’ll hold your hand every step of the way.
