Fit for business?
This time last year many owners were looking at ways of growing their businesses. Expansion, diversifying, acquisition – all were viable and exciting ways of building on their success. Then, from across the pond, came the credit crunch and the end of these aspirations as businesses were forced to concentrate on their strengths in the hope it would see them through the turmoil.
Get lean, get mean – it’s a phrase that has become synonymous with surviving the current squeeze. But what does it mean, and how can you ensure your business makes it through these choppy waters?
Step 1: Chasing Cash
When the downturn bites, cash is king. When business is going well and cash flow is good it can be easy to be generous with your customers and become a little lax with your credit terms. When times are hard, though, and the credit crunch starts to bite, it is important to strictly enforce those terms. The longer you allow a debt to stand, the greater the likelihood of it going bad; at any time, slow payment and delaying tactics indicate potential financial difficulty. In an economic downturn, however, the risk that those difficulties will prove terminal with a resultant bad debt become much more real.
Tony Pullen, managing director of Experian’s Business Information division, says: “Businesses are not only taking longer to settle bills after agreed terms, they are also extending those terms so that where they may have previously paid 30 days from invoice, they are pushing this out to 60 or even 90 days. The problem for smaller suppliers is exacerbated because they are often under pressure to settle their own bills quickly to secure goods and supplies essential to their business.”
Chris Sallnow, regional corporate manager at The Co-operative Bank’s Birmingham corporate banking centre, says the best thing to do is keep your existing clients on board by offering them a carrot, not a stick.
He says: “You might want to consider offering your customers incentives for early payment by putting a payment structure in place that gives a discount to customers paying before the first 15 days.
“On the flip side, as creditors, you should take full advantage of the credit terms available to you. If your suppliers give you an opportunity to expand your credit payment terms then make use of this and don’t pay until you have to.”
John Wright, Federation of Small Businesses National chairman, thinks that big boys have to play fair, saying: “Big companies appear to be aware that small businesses are afraid of taking them on over payment terms and are abusing their power as a result. Making small businesses wait 105 days for payment and charging them for the privilege is nothing short of outrageous.
“At a time when small businesses are finding it difficult to deal with a slowing economy and rising costs, it is shocking that large companies think it is acceptable to use them as an unofficial source of credit.”
Martin Williams, managing director of credit management firm Graydon UK says: “It’s dog eat dog. Small companies must act now and seek guidance from local advisers, accountants and banks that will give them the appropriate resources to really fight their corner.”
Step 2: Work Out Your Staffing Needs
This is the time to take a robust stance. Is money being spent unnecessarily? Whether it be staff, or other factors, identify the areas you may be able to trim down. But be careful not to take a knee-jerk reaction. While cuts may ease the pressure in the short term, any business needs to be ready to capitalise on an economic upturn when it occurs. It is always vital to consider what cost- saving measures could mean for your business – in the short and long term.
For most organisations the biggest cost is also the biggest resource – people. During a downturn it is often headcount that is cut without proper consideration of alternative ways in which savings can be made.
Clare Johnson, Cooper Parry’s HR consulting director, says: “You must review where your people costs are and identify if there is a better way they can be managed. If you don’t measure, how do you know if problems exist and savings can be made? For instance, measure your rates of sickness absence. If they are high, introduce return-to-work interviews. These are an excellent tool in deterring non-genuine sickness absence.”
But what about cutting back on in-house operations? Johnson thinks more companies will look to ship out services to save on staffing and office bills. She says outsourcing can help reduce your salary costs and any potential future employee liabilities. Payroll and facilities are often popular choices to be outsourced but accounting, IT and HR functions are more frequently being handed to external experts.
Pam Pindar, managing director of PBS, has also benefited from the drive towards outsourcing by offering payroll services. She says: “Outsourcing not only cuts costs, it also helps in terms of increased confidentiality and hassle-free service. Payroll is a necessity for all companies, and to employ one person or a department to carry out this task can be costly. It is a big responsibility.”
Step 3: Finding Finance
Having the right kind of financing in place is an essential part of managing cash flow. It is important to regularly review the finances of your business and plan well in advance for renewal of facilities or new projects and major expenditure. But, how easy is it to secure financing when the downturn is so severe? And, perhaps more importantly, what funding road should you go down?
James Kelsey, director of business services at Tenon, says the subject needs careful consideration – especially in times like these. “When purchasing a new asset such as a vehicle or piece of plant then HP or a finance lease are likely to be most appropriate. But if it is a high-value asset with a long life, such as a property, a mortgage or other long-term borrowing will be needed.”
Kelsey also says that if funding is more short term and fluctuating with spikes, such as when quarterly VAT payments are made, an overdraft may be appropriate. However, if you are looking to fund growth something more flexible, such as invoice financing, could be a better option as the facility automatically grows with your turnover and provides more predictable cash flow.
Mark Tucker, enterprise adviser at Business Link in the West Midlands, is confident that if your business model is sound you will be able prize the cash out of lenders. He says: “Rest assured that if your business idea is good, someone will help you fund it. The organisations that lend tend to be able to tell when, they too, will make a profit again, based on your plan.”
Kelsey agrees, saying: “The credit crunch is likely to continue for at least a year or two, so it will remain difficult to obtain and renew financing. But funding will still be available providing you have a sound business case. Lenders will be looking more closely in assessing proposals so it is crucial that you have a proper business plan, which has been prepared based on realistic assumptions and clear thinking.”
