How to protect your business and survive a recession
- Red You are more at risk going into a recession debt laden and with heavy overheads
- Amber A recession can focus the mind on cost control and lead to a much leaner business
- Green Recessions are part of the economic cycle: Be prepared for better times ahead
Surviving a recession can be tough for any business but there are steps you can take yourself during a downturn or difficult trading conditions.
COVID-19 Update – Planning for the end of lockdown and the revitalisation of your business
The COVID-19 situation is developing fast and the outlook is uncertain. However, there are a few things that we can be sure of.
- As the situation shows signs of improving, Government support will be withdrawn
- Businesses that survive will begin to re-establish revenues and repair their balance sheets
- Businesses will have to deal with the longer running effects of this disruption. Most likely a significant recession
Surviving a recession can be tough for any business but there are steps you can take during a downturn or period of difficult trading conditions.
What is a recession?
A good question to start with. The economic definition of a recession is a decline in GDP [Gross Domestic Product] for two consecutive quarters - a country’s GDP being the market value of all goods and services produced within that country. We can already see the damage being done to the UK GDP and estimates indicate that this contraction will be deep.
It’s entirely possible to have difficult trading conditions without technically being in a recession. For instance, over the last 2 years trading conditions have been made more difficult as a result of the uncertainty around Brexit. Add on top of that uncertainty the current COVID-19 pandemic, and you can see that we will probably be in for a very bumpy ride.
Why you need to look after your liquidity in a recession
The label you place on trading conditions is irrelevant, and to be honest, a lot of what you need to do, is good discipline anyway. However, these difficult conditions will definitely drive more focus.
We never stop emphasising the need to look after cash, but if you ever needed to look after your liquidity, now is the time. Other businesses who are struggling will try to hang on to their cash for longer. The businesses to which you owe money will be looking over their shoulders and demanding payment on time. If you’re late paying, they will be considering whether you are still a “safe bet”, should they put you on “stop” until you have cleared your account, or even consider taking formal action to clear the outstanding balance on your account.
Essentially everyone – including potential lenders – will be more cautious, which will tighten up the flow of cash generally.
What can I do to protect myself in a recession?
Look at the amount of money that you owe: is there anything that you can do to reduce this burden? In particular, can you reduce the impact of the debt? If you have lots of small regular outgoings that add up, can you clear one or two of these or consolidate the borrowing over a longer repayment period, so that less is going out each month? It may be that the interest rate is higher, but what is the monthly impact? The monthly cash saving may make the extra total interest cost worthwhile.
Equally important is the other side of the coin - creditors. If you’re struggling, then it’s highly likely that other businesses will be too, which is why your credit control must be tighter than ever. If someone isn’t paying you on time, you may have to stop doing business with them, until the matter is sorted. It might seem counter-intuitive to turn business away when you’re struggling for work but doing work that you might not be paid for is not going to help. You do not want to be dragged down by the failure of another business.
Improved credit control will reduce risk and improve your cash flow.
Look at your overheads during a recession
As the recent Government emergency programmes wind down (Grants, CBILS, Bounce Back Loans, etc.) you will need to plan to operate successfully in a new economic environment.
Most importantly, look at your overheads: Are there things that you can cut back on? If your sales have reduced, do you still need as many admin staff? If you reduce your staff, do you still need someone just to do wages or can you outsource it instead? Is there anything else that you can outsource, such as your bookkeeping or Human Resources? There will still be a cost involved but you have taken things like holiday pay or even holiday cover out of the equation. If you’ve now got less people working for you, do you still need all that space? If not, can you let part of it to someone else?
It may seem harsh “letting people go”, but if that is the difference between your business surviving or failing, then it is easy to see which is the preferable option.
Cut costs, not quality in a recession
Look to cut costs but don’t do this at the expense of quality: you don’t want your customers to be walking away or demanding lower prices because your product is not as good as it was before. Indeed, can you improve quality – without materially increasing costs – to increase price or market share and protect or increase your profitability that way?
I would be very cautious about “buying in” business at a loss. Yes, there is a need to keep your workforce employed, but how difficult is it going to be to push prices back up later?
Don’t ignore your creditors during a recession
Also, don’t ignore your creditors or bury your head in the sand. If you’re struggling to pay someone, talk to them and try to come to an agreement that you’re able to adhere to. You really don’t want anyone taking precipitative action - e.g. through the courts - when your resources are stretched. Apart from still having to deal with that creditor, word will soon get around, increasing the pressure.
And in summary
Remember that any recession or downturn is only temporary. No one really knows how long it will last, but economies are cyclical and will change. You have to be in a position to move forward again, so make sure that you haven’t burnt any bridges!
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