The UK is now officially out of recession. This is great news, if only because the doom-mongers in the media have less to depress us with. But did you know that more businesses fail during a recovery that in the recession itself? This fact is clearly borne out by previous recessions in the early 1990s and early 2000s.
Why is this?
1. The main reason is that, as businesses shrink during the recession, so do their working capital (cash) needs. When trade picks up, so do costs and payments, but the businesses do not have the cash to pay for them yet, because of the delay getting the cash in from their customers. This is despite the fact that, on paper, the business is profitable. This is known as ‘overtrading’.
2. Businesses stop investing during recessions. As they emerge, they need to catch up with technical innovations (new IT, marketing campaigns) to be competitive. This creates another cash drain.
3. There may well be more competition, e.g. from people made redundant who set up in competition and from other countries that had less of a downturn and where labour costs are lower.
4. The tax burden (often one of the biggest costs in a business) is even greater after a recession, as the government looks to repay its (i.e. our) debts.
5. The availability of funding from banks etc. to cover the cash shortfalls is very limited, and many of us have less equity in our houses to dip into.
How can you avoid failing into these traps?
a. Planning and forecasting are crucial. Think about the cash implications of every deal that you do. If you buy in stock or services, when will you get the (cash) return on that investment?
b. If you are likely to need funding to exploit great opportunities, ask for it now while you are in a relative position of strength rather than when you are desperate. Remember, the banks would rather lend to someone who doesn’t need the money now!
c. Make sure you agree terms with customers. If necessary, demand payment up front or use direct debits to take control of the payment process.
d. Keep even tighter reins on costs than you have during the recession.
e. Keep an eye on the economic trends, i.e. what ‘shape’ will the recession be? (See Pauline Williamson’s recent article on this.)
Do you have any other suggestions?
If you need help, e.g. planning and forecasting or reducing tax costs, let me know.
Chairman & Business Development Director