Managing a business is even more demanding when market conditions are tough or uncertain.
Planning can be difficult when your business, its customers and suppliers are faced with rising prices, falling sales, shrinking margins and cashflow problems. Redundancies and business failures further diminish market confidence while reduced orders and late payment can indicate problems within your market.
You cannot make your business completely bullet proof. However, taking appropriate action can help your business survive when economic conditions are tough. The first step is to carry out a ‘health check’, enabling you to identify your weaknesses and threats, as well as your strengths and opportunities. This will help you develop an effective survival strategy.
This guide outlines what to look out for when economic conditions are tough and how to ensure your business runs effectively. It gives advice on how to assess performance, financial considerations, how to implement a risk strategy and where to get support.
Table of Contents
Analyse the health of your business
Regularly assessing your business by looking at key performance indicators enables you to identify areas you need to improve. Addressing issues early on could prevent more severe consequences later.
How you organise and run your business affects your ability to manage the risks you face. For example, relying too heavily on too few customers can lead to cashflow problems for your business should one or more cease buying from you due to adverse financial conditions. See our page on how to know when your customers are in trouble in our guide on how to identify potential cashflow problems.
Think about ways of developing your existing market and customers – see the page in this guide on how to develop an effective survival strategy and our guides:
Or, you may find that the markets you serve have been severely affected by the economic conditions. In which case you may need to consider whether you can sell outside your existing market. See our guides on spotting market opportunities and entering overseas markets.
To assess how your business is performing, you need to look at the key areas of your business and finances. This will help you to identify risks, how to manage them and any other issues that may need addressing. If in doubt, you should discuss your approach with a professional business adviser.
Minimise cost and maximise efficiency
Minimising outgoings is vital to efficiency. It becomes critical when market conditions are tough. See our guide on business budgeting.
There should be a good business reason for any money your business spends and you need to receive maximum value for money.
What are fixed and variable costs?
Assess your fixed costs (often called overheads), which you pay for regardless of how much you produce or sell. They include rent, rates and wages. Many businesses fail to realise that savings can sometimes be made on these. See our guide on how to avoid insolvency.
Also try to make savings on your variable costs, which are linked to how much you produce or sell. Variable costs include materials, packaging, overtime and transport costs. See our guide on how to identify potential cashflow problems.
Cutting costs in the wrong areas can have a negative effect, so be careful. Also, focus on value for money rather than price alone. Read our guide on how to increase your profitability.
You may find that your business needs to adjust staff costs in order to survive the economic slowdown. This may mean that you could make savings by employing part-time workers for certain areas of your business and it may mean that circumstances oblige you to downsize and make certain roles redundant. Read our guide on employing part time workers.
Getting the most out of suppliers
To minimise your costs, you need to manage relationships with suppliers effectively and assess their performance regularly. Read our guide on how to manage your suppliers. Download guidance on monitoring suppliers’ performance [opens in a new window].
Your bank is also one of your business’ suppliers and you need to minimise your banking costs and make sure you get the cheapest form of credit available. See our guide on how to choose and manage a business bank account.
Keep your cashflow healthy
Cashflow is the balance of money entering and leaving a business. At all times you need to know how much money your business has in the bank, how much it owes and how much it is owed. Regularly updating your financial records enables you to do this.
Many businesses overcome short-term cashflow difficulties. Often these problems can be anticipated, which means solutions can be found before the problem is urgent.
The importance of cashflow forecasts
Forecasts showing likely sales, profit and loss, enable you to identify when additional funds might be required. Then you have time to make necessary provisions, for example, by arranging a bank loan or overdraft extension to get you through periods of difficulty.
Practical steps to maintain healthy cashflow include: reducing stock, minimising costs, maximising sales volume and margins, avoiding overtrading (ie taking on work you cannot fulfil to price), recovering debt through invoice discounting and factoring, renegotiating credit arrangements and selling off assets.
For more advice, read our guides: cashflow management: the basics and identify potential cashflow problems.
Practical steps to control credit
Effective credit control measures include checking new customers before granting credit and re-checking significant customers regularly (their circumstances can change). You could provide incentives for early payment, while all customers should know you charge interest on overdue payments. Chase all outstanding sums as soon as they become payable.
Debt factoring involves selling your outstanding invoices to a third party who (for a percentage) processes them and advances you money against sums you are owed. Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over administration of your sales ledger.
Read our guide to factoring and invoice discounting: the basics.
When debts become seriously overdue and all other efforts fail, you might have to take legal advice.
Download a guide to late payment legislation [opens in a new window].
Limit the risks your business faces
Risks are factors that could seriously impact your business. Risks can be large or small and can be the result of external or internal factors. They can be sector-specific and/or linked to wider economic considerations.
It pays to consider what you would do should certain worst-case scenarios arise, such as losing a major customer. Effective risk-management is the most efficient way to deal with such issues swiftly and decisively. Ask yourself some key ‘what if?’ questions.
You also need to consider potential opportunities that could arise. For example, if one of your competitors goes out of business, can you provide your goods or services to their customers?
Risks increase in times of economic upheaval. Inflation burdens businesses with additional costs and poor cashflow and lack of access to credit can also prove fatal. Increased competition and the risk of losing customers and/or failing to attract new ones are also risks most businesses face and which can be exacerbated by economic instability. It is also important that businesses are aware of other potential risks and problems and are able and willing to adapt to changing economic conditions.
Risk management means identifying potential threats and putting in place strategies to eliminate or reduce them.
Download a guide to risk management [opens in a new window].
A SWOT analysis – considering the business’ strengths, weaknesses, opportunities and threats – is an effective way to assess risk. While identifying your strengths enables you to recognise opportunities open to your business, potential threats can be uncovered by assessing your weaknesses.
Find out how to do a SWOT analysis on the RapidBI website- Opens in a new window.
Develop an effective survival strategy
When market conditions become tough or unpredictable, revisit your business plan, as previous targets might not be achievable.
Before setting new targets, consider factors such as recent trading results and current market research/knowledge.
Your business development strategies will also have to change. If your plans are to succeed, your goals must be realistic.
It pays to consider what you would do should certain worst-case scenarios arise, such as losing a major customer. Effective planning is the most efficient way to deal with such contingencies swiftly and decisively should they occur. Ask yourself some key ‘what if?’ questions. You also need to consider potential opportunities that could be presented, for example, if one of your competitors goes out of business.
You must have a clear strategy for looking after key customers and growing relationships with them, if you are to retain them. Keeping hold of existing customers is much cheaper than attracting new ones.
If your business experiences serious cashflow or funding problems, seek guidance from your bank, which might be able to provide you with a short-term financial solution.
Read our guides: manage your customer care and retain and grow your customer base.
Motivating employees
You also need to think about the effect tough or uncertain market conditions can have on your employees. Morale can sink quickly and feelings of anxiety can spread when people elsewhere are losing their jobs. As well as rewarding and recognising their achievements, you need to set targets and monitor their performance.
Read our guide on managing the performance of your staff.
Employers need to inspire confidence in their business and encourage a teamwork ethos. It is also important that you, the owner-manager, show strong, effective leadership and that you are successful in motivating those around you.
In addition, in a challenging economic climate, investing in skills and training is critical to increasing the competitiveness of your business.
Access sources of business support
Grants and loans are available to some businesses and the government’s Solutions for Business portfolio has been designed to provide help for businesses. To find out if you can benefit from these products and for more options Search our business support finder for grants, loans, expertise and advice for which your business may be eligible- Opens in a new window.
Solutions for Business products and services are only available in England. Government support for businesses is different in Scotland, Wales and Northern Ireland.
Working closely with your accountant and bank can also enable you to find ways to get through short-term cashflow problems.
If your business gets into severe financial difficulties you need to act quickly and decisively.
Business Debtline is a national helpline service that offers free, confidential, independent advice to small businesses on financial matters such as cashflow or debt problems. You can ask advice at any time, it doesn’t need to be urgent. Topics include the full range of debt issues, from dealing with tax arrears to avoiding repossession of a home or business. Get information about dealing with debt or cashflow issues on the Business Debtline website.
Checklist – key tasks when economic conditions are tough
Working your way – quickly, comprehensively and decisively – through key management tasks will ensure your business is better placed to deal with volatile market conditions. Some key tasks are as follows:
Analyse the health of your business
- learn to identify when a customer is in trouble
- consider ways of developing your existing markets and building on relationships with existing customers
- consider ways of developing new markets and finding new customers
Minimise cost and maximise efficiency
- minimise your fixed and variable costs by checking for better deals than you currently have, eg with utilities providers, contractors and suppliers
- manage your relationship with suppliers more effectively
- assess suppliers’ performance and seek the best possible deal
- review your bank charges quarterly
Keep your cashflow healthy
- tighten up your credit control and maintain a healthy cashflow
- learn to work with cashflow forecasts and ensure you are aware of your cash position at all times
- keep track of the time it takes for you to pay your suppliers and for your customers to pay you
- consider debt factoring and invoice discounting
Limit the risks your business faces
- develop strategies to manage all risks you face
- carry out a SWOT analysis
- consider worst-case scenarios and know exactly what to do if your business experiences serious financial problems
Develop an effective survival strategy
- revisit your business plan and development strategy and make changes according to your current circumstances
- inspire confidence and keep your employees focused and motivated.
Access sources of business support
- maintain good lines of communication with your accountant and bank
- seek advice from your business adviser
CASE STUDY
Here’s how my business survived adverse trading conditions
JoraPh Ltd is a specialist Oracle technology consultancy based in Telford with around 20 employees. After rapid early growth in an expanding hi-tech market, the company looked set for success. But when tough times hit, managing director David Phizacklea went back to basics to ensure the business’ survival. Here he explains how the measures taken to combat competitor activity, improve debt collection and overhaul the company’s service delivery model have put the business back on track.
What I did
Recognise the challenges
“Our business was originally based on the technical expertise of its co-founders, in implementing and optimising Oracle technology. A combination of professional reputation and an expanding market gave us a flying start, with revenue doubling year on year for the first four years.
“It wasn’t until our fifth year that we started to experience difficulties. We began bringing in sub-contractors to increase our capacity, but inadequate debt collection procedures meant that we were having to pay those contractors before we had been paid ourselves. This created obvious cashflow pressures.
“At the same time, word of our success began spreading within the industry and we quickly went from being ‘below the radar’ to being highly visible, so we found ourselves the target of a lot of competitor activity. We also found that potential customers were using our comparatively cheap rates as a means of driving down the contract price during competitive tenders. We were fighting for business and all too often losing, despite the fact that we knew we were good at what we did.”
Regroup and review
“The first step was to clamp down on costs and reduce the number of debtor days by tightening up debt collection practices. We also trimmed costs in other ways, such as improving efficiency and reducing staff numbers from 20 to 16 through natural turnover.
“Once we’d got the immediate cashflow situation under control, we were able to take a much-needed step back. We undertook a thorough financial analysis of the business at board level and sought advice from peers and mentors. Key points that emerged were that our sales costs were too high, brought on by knee-jerk attempts to prop up our market share, and that our service delivery model simply wasn’t working. We had been relying on our technical prowess to get us through and not paying enough attention to overall strategy or marketing ourselves effectively.
“We started by restructuring the consultancy team so that more of my time was freed up to concentrate on leadership and business strategy. We also took on a commercial manager and a business development manager to help us formulate and implement a proper sales and marketing plan.
“Another important decision was to focus on generating a regular revenue stream instead of relying on ad hoc short-term consultancy projects. We began by segmenting the business more clearly into products and services, which allowed us to analyse where the real profit potential lay. As a result, we have placed greater emphasis on our managed services, such as long-term database management contracts, plus the marketing of our own unique product, Jorascope, a data capture tool.”
Learn from the experience
“Surviving adverse trading conditions was a real lesson to us, in a way it was a blessing, because we’ve emerged all the stronger for it.
“On top of greater financial control and a revised strategy that’s starting to pay off, another advantage has been a huge increase in internal communication and teamwork. There used to be a definite division between the ‘techs’ and the ‘non-techs’, but now everyone in the business pulls together and realises the importance of selling ourselves at every opportunity.
“We have new products and customers in the pipeline and we’re also getting interest from potential distribution partners, opening up opportunities to sell the Jorascope product overseas.”
What I’d do differently
Focus on our strengths
“When trading conditions were tough, we didn’t have enough faith in our abilities and spent too long thinking that diversification was the only way forward. Once we re-focused strategy on our core strengths, things began to fall into place. Now we’re in a better position to gradually expand our offering by buying in third party products that genuinely complement our services.”
CASE STUDY
Here’s how I grew my business during a recession
Founded in 2002 by entrepreneur Jamie Doak, steel fabrication and blacksmith company Agri-Fab in Auchterarder, Perthshire has experienced rapid growth since its inception. With turnover almost doubling to £600,000 in 2008 and with the company on track to hit the £1 million mark in the current financial year, Agri-Fab is bucking current economic trends.
What I did
Get in touch with Business Gateway
“To make a success of your business you need to put in the hours and work hard, but you also need to have the right support mechanisms behind you. The team at Business Gateway has been there from the word go, providing invaluable guidance on a whole range of business issues including business planning, marketing and training.”
Invest in training
“Agri-Fab is certainly not a one-man band. Our success is down to the efforts of the ten-strong team and over the years we have invested heavily to ensure they are trained to the highest standards.”
Spend time networking and building up a list of contacts
“No one person has all the answers. Discuss issues with mentors, other business owners etc. Learn from the experience of others and find out what is best for your business. Don’t be afraid to try different ways of doing things. What works for another business may not always work for yours, but you will never know unless you try.”
What I’d do differently
Spend more time planning the business, products, strategy and even the business name
“We have just gone through an expensive process of changing our business name from Agri-Fab Engineering Services Ltd to Arc Steel Limited. I would also have delayed starting the business until I had more finance behind me. Lack of finance, especially at the start, leaves you at a great disadvantage with your competitors.”
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Every effort has been made by the author(s) to ensure this article’s accuracy but it does not constitute legal advice tailored to your circumstances. If you act on it, you acknowledge that you do so at your own risk. We cannot assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.
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