Planning for hard times

It’s easy to thrive in business when the economy is booming. Customers are happy to buy, banks are happy to lend, and staff are happy to do their work. But when things are going well, it’s easy to assume that they always will, and to slip into bad habits. Then, when recession looms, or something goes wrong with the sector in which you operate, you can find yourself facing hard times with a business which isn’t properly prepared for survival.

To avoid falling into this trap, and to escape the worst consequences of hard times, you need a method of recognising when they’re coming, and a survival plan to activate when they do, as they inevitably will. As well as the obvious, but often neglected, practice of using key indicators to monitor your progress against your business plan (see the separate business guide on the topic), there are some classic signs of looming difficulties, including:

• Rising bank charges and interest rates.
• Difficulty in getting your customers to pay on time.
• A slowdown in orders or a reduction in the size of orders.
• Suggestions from your suppliers that you pay early in return for discounts (this may seem like a good sign, but it means that they are finding things difficult, indicating a general sector slowdown).
• Staff telling stories of family members or friends suffering redundancy (another sign of general difficulties). 
• Reports of slowdowns in other important countries – even if you don’t deal abroad, your customers may.

There are many other indications, but it’s not isolated incidents that should worry you – it’s a sequence of events that could cause your business the most problems.

Creating your survival plan

Creating a survival plan is sometimes called contingency planning. The first step in creating a survival plan is to ask yourself the ‘what if’ question about each aspect of your business, for example:

• What if my biggest customer stops buying?
• What if I can’t obtain essential supplies?
• What if competition wrecks my best outlet?
• What if my cash-flow turns negative, with more going out each month than is coming in, making my overdraft expand?
• What if my staff leaves for better wages elsewhere?

Once you start asking such questions, you soon realise that most of them actually contain the seeds of their solution. This is particularly true of the first three questions, since they suggest that you may have allowed one aspect to dominate your business. Whether it is one big customer, one big outlet or one crucial supplier whose sudden demise would wreck your business, the fact that the possibility exists should tell you that it is time to take some action and spread your fragile eggs amongst several baskets.

Taking control

Take another look at those “What if…?” questions and you realise that they all boil down to a single question: “What if circumstances that I cannot control caused a threatening event?” This leads to the more interesting question of “Is there any way I can take control of the situation in advance?”

Obviously there isn’t much you can do to prevent terrorist attacks or dock strikes. On a longer timescale, you may be able to negotiate a better deal for that bigger customer which encourages them to come back to you, or perhaps throw a lifeline to the customer who is going broke – maybe even buy them out. Much the same goes for the disappearing supplier and even the competitor – if any of these organisations features so largely in your business, why not try for another slice of the cake by taking them under your control completely?

At the very least, you should be talking to your best customers on a regular basis, along with your most important suppliers, and maybe even your competitors. Unless the latter have made up their minds to destroy you, it may be possible to do some sort of a territorial deal with them. You could take on their smaller jobs that are uneconomical for them. You may even be able to persuade them to enter a strategic alliance with you by selling something complementary instead of identical to your product – you sell women’s shoes, they sell handbags – and then organise some joint advertising. For example, buying a full page of advertising in a magazine and dividing it among four partners is far cheaper than buying four separate quarters of that page.

As far as your customers and suppliers are concerned, when times are hard, everyone needs all the help they can get. Since you’re effectively ‘all in it together’, there will be several ways in which you can help each other. This is just another form of networking, and though you may not see any immediate benefits from this, the more you work together, the more beneficial it will be.

Understand the market better

Think along these lines: do you know exactly what your customers do with your product? How do they incorporate it into their product, or market it? How does it fit in with other products in their range, and how do they store them?

This applies equally to services. Could that report for a client be turned into a generic article for a trade magazine? Those forms you’ve designed for your client – do they want to keep them exclusive or would they let you put them on the open market for the rest of the sector? Or would they rather do the marketing themselves and give you a royalty?

All these questions also apply to your suppliers and what you do with their products – and they all lead to the more important question of “Is there a better way we can do this?”

Talk to your staff, too, especially if they start looking as if they may drift off to other jobs. Assuming that you get on with each other, there may be ways to satisfy their needs other than offering a bigger wage. Money is seldom the only reason for staff to move on, and you might be able to generate more loyalty by offering flexible working hours, time off for professional training or even helping them to become self-employed and using them as consultants instead of employees.

Improving your cash-flow

Almost all money problems come down to cash-flow. As long as that cash-flow includes your own remuneration, the ideal is an even flow of income and outgoings. There are many ways you can smooth this out.

The first of these is to organise payments to your suppliers so that they stay more or less the same each month, instead of having one big invoice every six months. If you aren’t going to use all the supplies in the month in which they arrive, why do you need them all to arrive at once? Unless the bulk discounts are bigger than the cost of your overdraft, you’d do better to order on a ‘just in time’ basis and save yourself the problems of storage, stock-taking and pilfering. The same consideration applies to getting your invoices paid – your customers might also prefer regular small payments to intermittent big ones.

The other side of this is that you need to make sure the payments that are due arrive on time. If this is creating a major problem, you might consider passing the collection task to someone else by using a factoring company. You should certainly make sure you wouldn’t lose out, particularly if a key customer goes bust, by spending a little money now on credit insurance.

Another aspect of spreading the load is to reschedule the times when you have to pay big annual bills. You may not be able to change the month when you have to pay your income tax, but it should be possible to move your insurance premiums and your VAT quarter. And if you are the sort of business where HM Revenue and Customs pay you instead of you paying them, it might be advantageous to opt for monthly VAT returns instead of quarterly ones. One small hotel whose business was strictly summer-only changed their VAT returns to monthly after the season was finished to gain faster repayment of VAT paid out on refurbishing the rooms and sports facilities.

An alternative strategy is to delay sending out invoices as you approach the end of your VAT quarter, sending them out a few days later at the beginning of the new quarter. This means that you will have the benefit of the VAT element in your bank for almost three months, instead of finding you have to pay over VAT before you have collected it.

Your accountant will know of many other ways to take advantage of timing. For instance, if you have to buy some new equipment it may make sense to do it just before the end of your tax year (when it will reduce your profits and thus your tax bill) instead of hanging on until the new tax year.

Maximising your income

As well as the obvious matter of reducing your costs, the best way to improve your cash-flow is to increase your income. There may be some ways in which you can produce some quick sums of money; for instance, by holding a sale of tired old stock (consult your accountant on the timing of this, too, as it will have an effect on your balance sheet if you sell that stock for less than cost). Although this strategy won’t necessarily solve your long-term problem (unless it allows you to move to a smaller, less expensive, storage situation), holding a sale will at least reduce your overdraft interest costs.

Do you have any sort of spare capacity, which you could turn to good use? For instance, you might think of:

• Renting out spare storage space in your warehouse. Many seasonal businesses need somewhere to keep their stock until their busy season starts, so think of Christmas goods for autumn storage and summer goods or sports equipment during the winter.
• Using your equipment to make someone else’s goods. One well-known manufacturer of children’s construction sets realised that the plastic-moulding machines they used could easily be adapted to make many other things, and started making fascia panels for a car manufacturer.
• Use your delivery vans to do someone else’s deliveries. For instance, if you are a wholesaler of quality cheeses making deliveries to delicatessens, what other products need to be delivered to those same shops?
• On the same complementary basis as the deliveries, is there a product your sales team could handle for another manufacturer?

To find such partners or opportunities, consult your local Chamber of Commerce, Enterprise Agency or trade magazines.

Take another look at how you operate

Often businesses carry on for years based on their original set of basic assumptions and never question whether what used to be correct still is. For instance, the fact that your initial product line was profitable when you started up five years ago doesn’t mean it is now, and it may be time to drop it and concentrate all your energies on newer products which give better returns for the time and effort you spend on them. Or could you buy products in instead of making them yourselves? If you haven’t checked prices lately, do so, then have another look at what it is costing you to produce the same thing.

And while you are checking prices, look at what other people charge for the products or services you produce. If the quality is the same as yours but the prices are higher, it has to be time you brought your own prices into line. If it is a long time since you raised your prices, you may need to do something to ‘add value’ to your products or your customers may just think you are taking advantage. At the end of the day, remember that your prices should reflect what the market will bear. Don’t be concerned that putting your prices up will cost you customers – you’ll probably only lose the unprofitable ones, and there is little point in keeping those.

Planning for hard times involves posing questions and questioning assumptions. The key questions are “What if…?” and “Is there a better way to do this?” Use the answers to drive your business forward.