UK company liquidations in the third quarter of 2008 were up 26% on the same quarter of 2007. In addition, the number of firms entering administration rose by 51%. Small business organisations complain that the banks are withdrawing loan and overdraft facilities and imposing hugely increased interest charges and arrangement fees.
If that wasn't enough, some credit insurers are cutting levels of cover or withdrawing completely from some sectors. Few believe that the UK economy will improve before 2010. So how can small businesses, particularly those recently established, manage their way through the recession?
Recessions usually mean that businesses experience a slowing of turnover growth or an outright reduction because of lower demand. Customers also typically take longer to pay for the goods and services they have purchased. Businesses selling to consumers may have to offer price reductions, as seen among high street retailers in the run-up to Christmas, and there is often increased competition from companies diversifying into new markets because their own market has shrunk.
The following points offer key areas around which small businesses should consider taking action. No two companies are the same and some businesses will already be doing some of the following well. If you can tick off all these actions, you are in good shape to survive the downturn.
Get closer to customers and suppliers
Small businesses usually have a limited number of key customers and suppliers. If one of these becomes insolvent it can be catastrophic. So you should monitor these key customers' behaviour in orders, sales, trading trends and business projections.
Most importantly, check their payment performance. Feedback from staff dealing with these customers can be invaluable in identifying signs that a customer is in financial distress or considering moving to another supplier. The same applies to key suppliers. Stress-test your business by asking what the effects of a key customer or supplier ceasing to trade would be.
is administration
Better credit management
In a recession active credit management is vital. This applies throughout the process, from vetting existing and potential new customers by taking out regular credit checks through to securing payment. Late payment is a particular issue in this recession and managing your receivables should be a high priority. Some key questions to ask are:
- Do you have payment terms? Do these include charging interest on late payment?
- Are the terms accepted by your customers?
- Do you get regular credit checks?
- Is there one person who is responsible for collecting receivables?
- What happens if customers go beyond your terms?
- Is there a procedure for the directors to get involved in pressuring customers to pay?
- How frequently is the aged debtors list reviewed by a director?
- What is the procedure for taking legal action to recover debts?
Manage cashflow
There is unlikely to be a time in your company's life when managing cashflow is more important. The basis of cashflow management is having a system whereby the directors receive daily information on the cash position, either in terms of balances at the bank or how much of the overdraft facility is unused. In addition, there must be regular forecasts of how the available facilities will change in the next week, month, quarter and year. These can be prepared on spreadsheets or easy-to-use accounts software. Automated cashflow management makes it a simple task to change assumptions if, for example, a major sales order is delayed by three months or sales demand drops by 10%.
Improve management reporting
Small businesses do not need, or cannot afford, to invest in real-time systems. But with the recession making access to finance difficult, many businesses are concerned enough to want information on their trading performance quicker than they have had in the past. Small businesses often produce monthly accounts late in the month, leaving directors and finance providers lacking important up-to-date information on their position.
But there are steps that can be taken to improve reporting deadlines, some requiring relatively small outlays. The main thing is often to make shorter timescales a greater priority. Benefits include quicker and better information on which to base decisions; better informed stakeholders, including finance providers; a more professional image when dealing with customers, suppliers and finance providers; more time for interrogation of the figures; and fewer surprises at the year-end. Finally, if your month-end reporting procedures are slick, producing the annual accounts at the end of the year should also be a straightforward routine.
Control gross margin and costs
Small businesses can improve gross margin by increasing selling prices; reducing the cost of purchased direct materials; improving the sales mix; reducing waste, write-offs and pilferage of stock; and introducing special lines or temporary products.
Some of these may be quickly discounted but it is worthwhile asking if they might be an option for you. Similarly, most small businesses are run with few overheads but situations change and a review of current and planned capital expenditure can yield cashflow savings and improve profitability.
Strategy, marketing and product development
Recessions tend to affect different business sectors to different degrees. Time spent on developing new products and markets can yield significant benefits, including reducing reliance on a few customers or one sector, entry into higher added-value products and increased gross margins. It can also increase your attractiveness to new equity providers once the recession is over.
Consider how your competitors are faring and how are they likely to respond to the current crisis. Intelligence from staff, suppliers and customers on competitors can help identify potential opportunities. You should also consider international markets, in particular the Gulf and Far East, which may present new opportunities.
Build relationships with finance providers
Even if your business currently has no borrowings or is operating well within the limits of its facilities, spending time with your current - and potential new - finance providers will be worthwhile. Some new SME finance schemes have recently been announced by the government while businesses which might require fresh equity capital to finance new marketing or product development, or to recapitalise after the recession, should find out what small scale equity schemes are available from business angels (private individuals looking to invest in businesses), regional development agencies and more formal private equity funds.
Ensure your business is appropriately financed
The range of finance options available to small firms has increased significantly. Companies seeking finance invariably think of a term loan (for a fixed period) or an overdraft. But it is important to make the finance appropriate to the purpose for which it is required. Overdrafts are excellent at providing flexible finance for working capital but they are repayable on demand. Factoring and invoice discounting should be considered as an alternative as they can yield a bigger percentage advance than an overdraft based on debtors.
Minimise tax payments
Small companies pay corporation tax on profits nine months after the year-end. Unincorporated businesses, such as sole traders and partnerships, pay instalments on 31 July and 31 January. You should check with your chartered accountant that you have availed yourself of all the legitimate ways of reducing the tax liability, such as using all capital allowances and including all allowable expenses. If your forecasts suggest that the business may have difficulty paying the taxes you should talk to your chartered accountant before approaching HMRC for proposals to pay by instalments.
In the 2008 pre-Budget report, chancellor Alistair Darling announced that HRMC had launched a new business payment support service to help businesses finding it difficult to make tax payments on time, including corporation tax, VAT, PAYE and national insurance contributions. Businesses experiencing temporary financial difficulties or needing more time to pay an outstanding tax bill can now agree a timetable of payments that they will be able to afford. For further details visit www.hmrc.gov.uk/pbr2008/business-payment.htm
If you have taken action on all of the above points your business is financially well managed. If your answers to some of the above questions are negative, a conversation with your chartered accountant or another trusted adviser would be a good starting point in helping to decide what steps to take. It is worth remembering the saying "If it doesn't kill you, it will make you stronger". This can apply to the financial management of your business in a recession too.
Clive Lewis is head of SME issues at the Institute of Chartered Accountants in England and Wales
