How your business can stay ahead as the economy grows
The economic recovery is underway in Britain: employment is increasing and the resultant boost in consumer confidence is fuelling growth. Should businesses breathe a sigh of relief?
The transition from recession to recovery can present businesses with a particular set of problems. According to professional services firm BDO, businesses are often more at risk of failure at the beginning of a recovery than at the peak of a recession. Many are in a weakened state after riding out the downturn, and struggle when demand for their products or services increases.
In this article, we discuss how your business can stay ahead as the economy grows, identifying the potential pitfalls and perils to look out for, and how to mitigate them.
Cash is king, and without it you simply cannot continue to trade. During a period of economic recovery, there is a risk of overtrading, which occurs when businesses take on more work than they are able to fulfil. Early warning signs include being cash-short and having to extend an overdraft facility unexpectedly, as you pay out more to suppliers than you are receiving from customers.
Graham Rusling, Global Head of Business Support, Barclays, says: “Some businesses can survive for years while operating at a loss, but they will always fail if they run out of cash. There’s a real need for businesses to monitor and review where their cash is going, and to look ahead.
“Order books increase as we come out of recession, so firms need to invest more in the working capital cycle as stock levels and the amount extended in credit to customers increases. Therefore it is essential companies invest in the business if they can, or retain profits in the business which are eventually turned into cash.”
Knowing your break-even point and profit margin on all sales is key. A suitable level of working capital, clear credit lines with suppliers, and timing outgoings carefully will all help too. Your bank and accountant can also provide very valuable guidance in these areas.
Being vigilant around late payments is also crucial. Businesses should always factor the potential for customers to pay later than expected into their plans. This is common, and according to the Department for Business, Innovation & Skills Small Business Survey 2012, some 55% of medium-sized businesses encounter this issue.
There are however several actions which can help to prevent late payments taking place, including invoicing on time, chasing invoices regularly and establishing clearly defined payments terms with customers.
Lack of information
Good communication internally is as vital to companies as is good communication with their trading partners, in order to establish a true picture of how the business is performing
Business owners with a poor knowledge of their day-to-day operations, and the corresponding financial positions, are less likely to successfully steer their firm through the transition from recession to recovery. Rusling explains: “Some businesses have a false picture, where staff are giving management too rosy a view of what’s going on.
“This means that valuable time and the opportunity to take early action is lost when the business is running into difficulties, with decisions being made well after the point when they should have.”
Late provision of management information can be a key indicator of concern for the health of the business – “good news travels much faster than bad”.
Lack of planning
When a business is moving fast in the recovery stage, forward-planning can drop down your to-do list when there are seemingly more urgent priorities to deal with. However, a lack of proper planning can be fatal.
“Lots of businesses muddle along without knowing where they are through a lack of management information and forecasts,” Rusling says. “Companies need to have a plan B, for situations such as a customer failing to pay when they should do. If there’s no plan, then they’re forced to be very reactive when problems do arise, rather than being proactive and knowing what they will do when these situations occur.”
Planning ahead helps you identify opportunities and problems early on, while sticking to a budget means you’re less likely to overstretch the business. This gives you the leeway you need to cope with unexpected events.
The good news
There is no reason why companies that remain intact through a recession should then fail as prospects improve, provided they are aware of the changing environment and adapt accordingly.
If however, things do begin to go wrong, involving your bank at the earliest opportunity can be a business-saving measure. Rusling explains: “If a company tells us the week before it’s about to go bust, then there’s not a lot that we can do. But 80% of the businesses that we help with implementing a turnaround plan go on to remain being successful.”
As Britain’s economy begins to fire up, it’s time to take stock and check your business is ready for action. If not, why not? It’s time to act now.
Produced in partnership with Barclays