Recession Proof Your Business

Released On 20th May 2023

The UK’s not in recession, but is it going to be? With the difficulty in trying to find skilled labour, pressure on wages, industrial strikes, supply chain problems and massive inflation we might just be heading for one, or at best, a stagnant economy. Furthermore, for businesses dealing with the fallout from Brexit, the economic restrictions and the extra costs that are being placed on them make it even more difficult.

Overall, when comparing figures on how the UK’s economy and that of other similar countries’ economies, the UK’s is the one that’s faring the worst.

Businesses have had a mixture of responses during these difficult times and Graham, Managing Director here at Wessex Commercial, not only has a background in industry, but has had his own businesses and has been through recessions himself. So, in today’s post, we will be looking at problems caused by recession, as well as the opportunities, focusing on the importance of cash within a business and finally thoughts on adapting your business to cope with a recession or stagnant economy.

Be Aware of Problems Businesses Face in a Recession

Your customers are trying to keep their prices tight and keep their costs down, which in turn means they are trying to get your prices down and are resistance to any price increases. This results in your margins being squeezed along with potentially your sale volumes going down – people just don’t buy as much in a recession.
It’s harder to borrow with the interest rates going up. Borrowing costs are now often above 6%, whereas a couple of years ago they were half that. Banks and traditional financial institutions tend to lend to good credit risk customers, so you must find different ways to raise finance in recession. There are lots of alternative providers but be careful where they require personal guarantees and ensure you understand the true financial cost of these products.
Make sure you’re up to date with your accounts and you understand how you’re extracting remuneration. If you’re making profits, look at the structure of how you extract your remuneration, which is often minimum salary just over the National Insurance thresholds, and dividends. But be careful! A lot of businesses think they’re profitable, take dividends, but when they get their annual accounts back, they find they’re not making profits. This could result in dividends being disallowed and treated as overdrawn Directors Loan Account, which creates tax and repayment issues. And worse if you go into liquidation, the liquidator will look to you for that money back. Therefore, make sure you’ve got enough post-tax profits to be able to pay dividends. Also, with the changes in R&D tax and Corporation Tax rates, this may mean a different remuneration strategy. All our clients have at least quarterly management accounts so we can help advise on remuneration changes as well as other issues that we spot.

Be Aware of Opportunities For Businesses in a Recession

Your Competitors May Struggle – You may have a competitor that’s in trouble. They may have to make cuts and they may not be looking after their customers as well as before, which could benefit you. Talk to your customers to understand what they want and if you’ve got any other ways of making buying from you simpler whilst up-selling to them when you can.
There are a lot of startups in recession, which is an opportunity and risk – There can be opportunities to partner with some of these, but also there’s a risk that they could be competitors. People make use of the redundancy payments to start up their own business.
There’s likely to be a lot of corporate redundancies which potentially brings good people to a skills shortage market.

Adapting Your Business to Cope With Recession

Cash flow and Credit Control- If you give customers credit then make sure your credit control is good, with regular checks on existing customers, especially the larger debts. If you’re worried, then look at credit insurance. This is a very good barometer because they have a much wider customer spread, and they will stop giving credit insurance well before a company goes bust. Or sign up to a credit agency, such as Credit Safe, Equifax, or Experian and get regular reports on how well the company’s doing. Take steps to get paid promptly, using such means as up front proforma invoices, Automated Credit Control Reminders, Direct Debits, Milestone Payments etc. Look at mechanisms for ‘what happens if they don’t pay’ especially what leverage have you got? If you’ve got a big order, spread it. Make sure you try and match cash payments out to those coming in with longer supplier terms than those you give to your customers. If they can’t pay on time, then discuss payment plans. With taxes you’ve got Time To Pay, but with that, just make sure you talk to HMRC if you ever have any problems.
Know where you’re making money and where you’re not to aid decisions – Do you have an element of the business that’s holding everything back. Whether it’s a customer, a market, staff, a location etc. Make sure you’ve got it analysed properly so you know where/if there’s a problem. Sometimes there’s an area you think is doing okay, but really it is dragging the rest of the business down. And if that’s the case look at how you can improve it or get rid of it.
Cost Cutting & Inefficiencies – Many tasks could probably be automated, and making the best use of time is vital, so look at automating and simplifying tasks. Understand your return on investment here before making decisions like cutting marketing, because how’s anybody going to know where to find you? Marketing is key for any business so prospective customers understand that you’re still here for them. For certain areas do you need a full-time person. For instance, could you outsource health and safety, bookkeeping, IT, HR etc. This is often beneficial for cutting wastage and inefficiencies. Maximise utilisation of stock, vehicles and plant to ensure that you are getting the most out of your resources.
Spread your risk – Avoid being reliant on one or two major customers, because if one gives you a problem, slows down or goes bust, it’s going to slow your cash and possibly cause you financial problems.
Plan where you’re going and listen – Create a simple 1-to-3-page strategic business plan for the next couple of years. Talk to your accountant / business adviser and employees, as often they’ve got good ideas, including how to increase sales, productivity and attract customers. Talk to your customers or prospective customers, especially about what they need and how you could make it easier for them to buy from you. Set quarterly goals and simple financial / cash projections. See if you can be more flexible, responsive, and lean. Understand your numbers – what products or services make you money and what doesn’t?

To conclude, it is important to understand your numbers whether we are in a recession or not, and if you don’t understand, then find someone that can help to do so. Generally, those that are aware of their numbers are the ones that survive.