Director’s Toolbox: 5 Steps to Recession Proof Your Business
So, what will the lasting economic damage of the COVID-19 pandemic, and how can you protect your business as best as possible?
One answer is to look back at previous recessions. In the 1990/91 recession around 24,000 businesses went into liquidation or were declared insolvent. This compares with approximately 27,000 businesses that went under as a result of the 2008/9 recession.
As yet, we don’t know what the figures will end up being for this current recession. It may not be until schemes such as furlough have ended, and Bounce Back Loan repayments begin to fall due, that we start to see the full impact in terms of business closures, especially amongst SMEs.
However, despite this, and the fact that in some ways the current downturn is very different to those seen previously, we can still use the lessons learned from the past to show us how we can best prepare our businesses to survive in the present.
How to recession proof your business
The following are the key areas where I believe you should focus in order to protect your business.
Cashflow is king
As the saying goes, “Turnover is vanity, profit is sanity, and cashflow is king”. Without cash flow, all the paper profit in the world won’t save a business from becoming insolvent.
There are a number of obvious ways to try and improve cashflow.
- Beef up your credit control function and crack down on late paying customers.
- Consider the use of early payment discounts, or even tighten up your general payment terms.
- Do not pay suppliers until the invoice is actually due; the longer the cash is in your account the better.
- Get a good handle on stock and work in progress – this is essentially cash tied up in non-liquid assets and as such should be kept to a practical minimum.
- Use overdraft facilities, government support schemes, and invoice financing where necessary to bolster cash reserves in the short to medium term.
Priority action: Setup a practical cashflow forecast that rolls forward and covers at least the next quarter (ask your accountant for help if needed) and update it regularly based on what actually happens. This will help you to zero in on where your cash is going and enable you to predict when and where you will have pressure points. It will also tell you where to focus your efforts and whether you need any extra help.
Trim the fat
It is often true that when times are good (or challenging), staff and directors are fully occupied just keeping up with workflow and the bottom line tends to get neglected. There is therefore no better time than the present to fully analyse and keep a close eye on expenditure in your business.
This can be a painstaking exercise, especially because it is important to be thorough and deliberate, but in the long term your business will be leaner and more profitable as a result.
Actions to take include:
- Go through your profit and loss line by line and consider what is needed and what is not.
- Consider the expense and the ‘real’ benefit it brings to your business, not just in the next six months, but in the medium and longer term.
- Remember that cutting too deep can be just as bad as making no changes at all. Certain areas which might seem on the surface to be obvious targets for savings could be vitally important to the maintenance and growth of your business. For instance, it might seem tempting to cut the marketing budget, and in the short-term, cuts here might not seem to produce a negative outcome. Yet, consider the fact that if you are not attracting new customers through good use of marketing, then you may just be setting your business up to fail in a year or two’s time.
Priority action: Consider whether any of the savings made during the pandemic might be capable of becoming permanent. Less travel and more meetings being conducted virtually, for example, may become embedded in your company culture.
Look after your existing customers
Many businesses focus a lot of time and energy on pursuing new work and customers, and at the risk of generalising, this often comes at the cost of not devoting sufficient resources to maintaining the existing customer base. This is especially important in a time of recession where the availability of new work may be severely diminished and in which the loyalty of your current customers will be integral to maintaining revenues.
As a general rule it is a cheaper to keep an existing customer than it is to acquire a new one (administrative cost of ‘onboarding’, time investment needed to build relationship, etc). It is therefore important to set aside staff time and resource to the periodic review of existing customer relationships.
Questions to ask could include:
- When was the last time someone caught up with them to see whether they are still happy with the product/service?
- Would it be possible to offer them any additional services?
- Do they actually represent a profitable relationship for you (sometimes losing a problem customer can actually be beneficial)?
Priority action: Carry out an internal analysis of your existing customers and score them against criteria such as profit margin, total sales, customer support provided, type of relationship, growth potential etc. Once you have ascertained who your top customers are, you will be able to take the necessary steps to make sure the majority of your business development and marketing activity is spent retaining and growing ongoing business with them.
Focus on the big picture
As a business owner or director, try to avoid getting bogged down in the nitty gritty day-to-day operations of your business. Part of your role is ‘steering the ship’, which simply put means ensuring that you keep at least one eye on business strategy at all times.
In practical terms this means a few different things.
- Ensuring that when the business is under strain in a recession that focus is maintained on core competencies, for example recognising that now is probably not the time to be embarking on risky, expensive, diversification projects.
- Updating your SWOT analysis; how can the business build on its strengths, mitigate its weaknesses, take advantage of any opportunities, and respond to threats.
- Assessing which of your tasks can be delegated either to other employees, or to an outsourced provision.
Priority action: Make sure that the business holds fast to its USPs and what differentiates it from its competition. Remember that an economic downturn is temporary, and any dilution of your proposition will hamper your recovery once trading picks up again.
Adopt the right frame of mind
Lastly, and the least tangible of my recommendations, is to observe and adopt that common business axiom which says that the board of directors of a company should look to “set the tone from the top”. Your staff, and to a certain extent all of your stakeholders, will look to you and your fellow directors for guidance and leadership, particularly in these troubling times.
It is therefore important that both internally and externally you:
- Project a sense of confidence in your business.
- Show a willingness to listen to advice and change direction if required (remember that one of the biggest advantages of being an SME is adaptability).
- Act decisively when action is required. You have to be prepared to make tough decisions and plan strategically for the future.
Priority action: Decide to do something positive now. You have chosen to be a business owner or director, and that in itself means you are in the best position to adapt and adjust your business to take advantage of the opportunities that typically arrive in a recession.