Survive the credit crunch
For most businesses, the next year or so will be a time of battening down the hatches as they see their profits squeezed, their cash flows under increasing pressure, and the banks not as 'profligate' as they were before. The companies that manage to trade through this period will find most of the answers lying within, rather than outside, the business. For them, cash will be 'King', all thoughts of growing market share or maintaining profitability will be sidelined as the focus is placed firmly on a survival of the (cash) fittest.
Smaller businesses with no 'unique selling point' will struggle more than most because the survival of their customers' and suppliers' own businesses does not rely on their continued existence. To them past relationships will count for nought as such smaller businesses are a mere 'cash flow issue', an opportunity for customers to make a one off profit as competitors move in and provide a similar service at a similar price. Few, even the largest companies, will be unaffected by the downturn.
With virtually every business in the UK expected to make some changes to the way they operate in order to conserve cash, some just to survive, others to put themselves in a better position to make the best off the upturn when it comes, what are the key steps management should take to increase the generation of cash, and maximise the retention of cash, within the business?
The answer probably lies in a combination of actions:
- Cut out all non-essential expenditure. Do it now, do not defer it for another day. Be brutal, assume that the sector will not recover quickly, if at all. If you have cut too deeply, you can probably repair things later on. If you do not cut deeply enough, you could die 'a death of a thousand cuts' , others on whom you may need to rely later for support will view your management skills as weak.
- Recognise where your commercial muscle lies, and then fully utilise it. This can be on the supply side (typically) or sales side (less often). Use your muscle to obtain longer payment terms from your suppliers. They will not want to see you reduce your spend or go out of business. Use your muscle to secure earlier payment from your customers. They may need your prompt service or wish to see you reduce your prices to help them survive. Be flexible, do what is necessary in the short to medium term.
- Reduce your fixed costs (those that you have to pay regardless of how busy you are) and increase the proportion of variable costs that you have. Examples of this include taking on temporary rather than permanent staff. Changing your cost base to one that is more resilient to unforeseen changes in activity levels will increase the chances of you surviving the battle of the fittest.
- Keep on good terms with your bank and HM Revenue & Customs. The bank's view is often that as the largest single investor in your business, you should have more regard to their interests than others'. HMRC's view is that, as an 'involuntary' creditor, any ' investment' in your business is probably too much. Don't rely on getting better terms from either, expect both to cut a hard bargain. But be fair with them and recognise their views, and they will probably be fair with you.
- Cut your own outgoings. You will not encourage others to work with you and support you if they do not see you hurting too.
Finally, as many businesses or businessmen have not been through a period such as this before, take early advice from you accountants or an Insolvency Practitioner early. They will take a helicopter view of your business and compare what is achievable for you with what they have seen elsewhere and before. Use their experience to your best advantage and do not try to paddle on through stormy waters in your own, lonely, boat.
Date: 9th December, 2008
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