With research highlighting that 1 in 5 businesses are concerned that they could face insolvency in the next 12 months, what can you do to up your chances of survival and get recession ready?
Recent research commissioned by Evelyn Partners reveals that an unsettlingly high number of 1 in 5 (22%) businesses are concerned that they will be unable to survive a recession in the next 12 months.
With escalating energy costs, inflation at its highest level in 40 years, rapidly rising interest rates and a government in turmoil, things look bleak for business.
However, it is not too late to act. There are 8 key actions that every business should consider taking to maximise their chances of weathering the storm.
Most important is to really understand your business. Every business should make sure it has robust financial information at its fingertips. This should include detailed forecasts, which you can easily sensitise to show the impact of various scenarios, regular management reporting and KPI monitoring. Being aware of your issues and risks is the first step in being able to effectively address them.
Secondly, manage your cash. When the economy is strong, and finance is readily available, businesses naturally focus on profitability. However, in a recessionary environment, liquidity takes on extra significance and even profitable opportunities can impact on your cash reserves. Having both a long term and 13-week cash flow, which you keep regularly updated, helps identify cash crunch points and allows you to plan for them.
Alongside managing your cash, it is also essential to review your financing arrangements. Are any of your facilities expiring shortly? Is there a risk you will breach your bank covenants? Does your finance repayment schedule clash with your business cash flow?
If the answer to any of these questions is yes, engage with your lenders and explore possible refinancing opportunities early, so as to divert a crisis before it arises.
It is also important to strengthen your controls around cost management. It is all very well having a robust plan and detailed cash flow forecast but if there is a lack of cost control within your organisation you may soon find yourself struggling to meet those forecasts. Make sure your controls are sufficient to deter unnecessary and discretionary spend.
Reviewing your costs and operational processes to maximise efficiency is always a worthwhile exercise, but it is incredibly important in a recessionary environment. Identify your key costs and core processes and consider how you can reduce spend or eliminate unnecessary tasks. Options to consider may include streamlining suppliers, reducing your use of resources or using technologies to automate processes.
Staff costs are often the biggest cost within an organisation and streamlining your structure can often present an opportunity to reduce costs. However, staff are also your biggest asset, so look after them and treat them with respect and honesty. Providing your staff with key information on business performance and aligning staff performance and pay with your business objectives can get everyone pulling in the same direction. Also critically review your staff retention – high staff turnover rates not only impact business operations but also increase cost in terms of recruitment and training.
Don’t operate in isolation. Consider the impact of both your actions and the wider economy on your customers and suppliers. They will be experiencing similar issues to you.. Consider how this could ultimately affect you. For example, through customer defaults, late payments, restrictions on supply or quality issues. Have contingency plans to address these issues and stay in regular communication with your key business partners so you can identify and react to potential issues in advance.
Finally, take advice early – if you do have concerns or can see a crisis looming, don’t bury your head in the sand but instead look up and take advice at the earliest possible opportunity. This will maximise the options open to you.
Whilst the above actions are ones that should be considered in the current economic climate, they represent general good business management and help businesses operate in an efficient, and effective manner within any set of economic circumstances.
It is not so much a matter of being recession ready as being business aware.
