It’s difficult not to be overwhelmed by the scale of economic challenges facing small businesses this year. But with a little creative thinking and a proactive strategy, it’s possible to weather the storm.
To state the obvious, it is not business as usual right now. Times are uncertain and will continue to be for some time. As a small business owner, you may feel anxious about the future and the financial impacts of the current economic slowdown.
While there is no one-size-fits-all solution, there are some steps you can take to manage a recession and keep your business afloat. Here are our top five.
1. Anticipate a drop in sales
When the cost of living goes up, consumers respond by tightening their belts and cutting back on non-essential spending. They don’t buy as much and are more cost-conscious in the purchases they do make, which can work against small businesses. When sales slow down, it puts a tremendous strain on cash flow and can make it difficult to keep up with day-to-day expenses.
To prepare for this scenario:
- Make sure you’re supplying goods and services at the level of current demand, not what it was pre-recession.
- Keep a sharp eye on inventory levels and ensure that you’re not overstocking in anticipation of more sales than you’ll be able to make in reality.
- Look for ways to provide more added value, if it doesn’t hurt your margins. For example, could you fine-tune your customer service or warranties to support your pricing?
2. Prepare for delayed payments
Data shows that during recessions, customers and suppliers wait longer to pay their invoices. In some cases, debtor days (the average time to get paid) can stretch to 3-4 months or more. This could cause serious cash flow problems, so it’s important to set up processes and contingencies to deal with this.
To proactively manage payments:
- Get your invoices out quickly. The clock doesn’t start ticking until the invoice is issued so dilly-dallying can be costly.
- Set up a credit control process in which invoices are monitored and chased accordingly.
- Give customers as many payment options as possible. This could include offering a discount for early payments or allowing customers to pay in instalments – whatever helps them to pay more quickly.
3. Tighten up your cash flow management
Most small businesses in the UK only hold enough cash to cover 15-20 days of operations, so cash flow management is key. Companies with poor cash flow struggle to pay their vendors, staff, bills and loans. And that blows up the panic for everyone.
To manage your cash better:
- Set up an effective accounting system and track income and expenditure with precision.
- Work with a professional to set up accurate projections and forecasts so you know exactly how much money you can expect in and out of your business.
- Review your spending and take steps to trim your budget. Start by identifying non-essential expenses that can be cut without affecting the customer experience.
4. Stop the squeeze on margins
When inflation is high, you may have to hike up your own prices just to stay afloat. But this must be done in moderation or sales will tank. It’s a balancing act between increasing prices enough to stay profitable and keeping them low enough so your customers still buy from you.
To ensure that your margins remain healthy:
- Make sure your pricing is competitive and, wherever possible, that you have a good range of options available to appeal to different budgets. This should help you avoid making sweeping price cuts across the board.
- Get the price increase right the first time so you’re not going back to customers to ask for more later down the line, which can leave a bad taste in customers’ mouths.
- Be very clear in your communication. Explain why your prices have gone up and make sure that customers know what extra value they’re getting in return.
5. Protect your access to finance
There’s a triple-whammy of risk when it comes to accessing finance during a recession. First, banks tend to tighten their lending criteria when the economy takes a hit and small businesses may find it disproportionately hard to get a loan. Second, the assets you use to secure loans like equipment, inventory or accounts receivable tend to lose value in downturns, so your options might shrink. And third, you may have a hard time finding the free cash flow required to make loan payments when sales are down.
To make sure you’re not left high and dry:
- Start looking for finance options early, before you need them. This way, you can apply for loans when banks are still willing to lend and your assets have their full value.
- Have an accountant put together some solid financial projections. Lenders have more confidence in businesses that can accurately predict their cash flow.
- If you do take out a loan, make sure that the interest rate is fixed. You don’t want to be hit with an unexpected rate hike when the economy takes a turn for the worse.
Final words
Managing a business through an economic downturn is no easy feat. But, with some smart planning and good preparation, you can weather the storm and come out to the other side in one piece – and perhaps more efficient and profitable than before. Remember, the team at Kenwrights is always here to help you through the ups and downs of business life. Reach out if you need our assistance, we’re happy to help!
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