How will my small business weather a recession?
Talking about recession is scary and negative. But not talking about it is dangerous and a bit like the ostrich with it's head in the sand . We'll keep this write-up factual. An economic downturn is a great time for small and big businesses to look at itself hard.
UK's inflation rate is currently double-digits (nearly 11.1% at the time of writing) - yet there are many small business owners that don't understand how a general recessionary economy will affect them personally and what can be done to mitigate some of the risk you will face.
1. Understanding recession, inflation and what it means for your business
A recession affects everyone, irrespective of the type and size of business you run. However, the impact levels vary. So understanding what each of this is, specifically for your business is critical.
There are companies that have cash balances kept aside to deal with a period of prolonged downturn. This is a great place to be; but maybe you're not there. There is no need to panic. The first thing we always advice is to "Take Stock". Dissect and understand your business from the inside out.
- Are you in a type of industry that is seasonal? Perhaps your product falls into a "vanity category"? Or it's essential goods that people will prioritise on their buying lists?
- What kind of credit do you operate on? 30-60-90 days? How does that work out in terms of your payment terms. Often people have 30-day terms for fixed costs (Rent, salaries)
- How long can your business survive if your biggest customer leave suddenly?
and so on...
There is no easy way to do this. You should have your numbers to hand as most of these are driven financially.
2. Deciding money matters for your business
If you don't have an Accountant or book-keeper, this gets tricky. If you're not numbers savvy, please get advice from a professional, many offer hourly rates.
A lot of small business owners I've met are quite sensible in that department; they know enough to understand how their business is faring financially. A few points here for consideration,
- Run some scenarios for your business: How long does the cash reserves you have sustain in different situations: Such as
~ If you keep the current growth trajectory OR the current loss-making situation?
~ Does cost-cutting make sense OR can you scale back things to take everyone along?
- Often when you look to make a numbers-based decision other considerations fade away. In a recessionary situation, don't overlook your people. Everyone is struggling. People might be willing to work less hours rather than lose their jobs entirely.
- Research sources of funds for your business:
~ Can you manage an overdraft facility from your bank? You may not need an overdraft right away but it's always easier to negotiate one when your cash balances are higher in the bank.
~ Are grants an option for your business? I can recommend Silicon South for Bournemouth or Dorset based businesses as they will help you through a grant-application process.
3. A cash flow forecast is your best friend
Modelling a cash flow doesn't have to be super complex. There are many a software out there that will do it for you. But for quick turnaround, Excel /Google sheets are a trusty comrade. If you use Xero or a similar software, the easiest thing to do is to run a "Cash-based" profit and loss account for a year; month by month.
You can work out actual incomings and outgoings from that report. Add in things like VAT paid, Director's loans and purchase of fixed assets into the same format. Once you get a format you understand and can comfortably work with, make sure to look at it consistently. It's a good idea to look through this weekly if cash is tight. It'll help you prioritise and plan payments as well as chase down receivables faster and more accurately.
4. Know what to do when a customer cannot or will not pay
Most of us will have that odd customer who is a bad-payer. The likely reason for this is lack of funds. However, we've had scenarios where some customers wilfully don't pay or puts you as the lowest priority on their payment run. This is a hard place to be.
You need to have an idea of what you'll do if you're in this situation. Firstly the customer might be a big one, well reputed perhaps and in every way your ideal customer. Think about this for a second though. How ideal can a customer be unless they are willing to part with money to buy your services? If you have a key contact there that is not a finance person, that's the first port of call. They can probably help you manoeuvre this.
Once you've tried your usual avenues, have an escalation plan in place. That could be passing it to your own team members/Management higher in line than yourself to chase the debt down. If all else fails, you need to consider legal options. Perhaps start with a debt collection agency and from there escalate to a legal team. However this comes with a higher price tag.
A recession is hard on everyone. But as the saying goes, tough times never last, but tough people do.
While these are not the traditional measures to take when in a recession, we hope it gives you some actionable items. Would you like to talk? Please get in touch today.
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