Survival thus far will have been achieved by a combination of ruthless cost control, de-stocking, extended credit terms, wage restraint and luck. Don’t ignore the luck factor – apart from the general malaise affecting UK PLC since the collapse of Lehmans, nothing uniquely catastrophic has happened to your business.
It may yet. After six quarters of GDP shrinkage, Q4 2009 marked the UK’s first foray into positive territory since Q1 2008. But in Q1 2010, the combination of appalling weather, the VAT rise, and the prospect of an austerity budget may well lead to a drop in consumption that will take us back into negative territory. Even if it doesn’t, the prospects for UK PLC over the next two to three years aren’t great.
Here are some points you ought to consider:
Business model review: Your business model needs to reflect the likelihood that the bounce-back will be subdued. This is a different scenario to the one you’ve managed for the past 18 months, so your modelling does need to change. A programme of cost reduction can only continue for so long before it eats into the basic building blocks of your business – you now need to look at a business model aimed at sustainability rather than shrinkage.
Bank finance: Banks are being absolutely honest when they say they are still open for business. But with fewer banks, all rebuilding capital ratios, commercial managers are being allocated smaller lending pots. The finance that is available is quickly absorbed meeting the funding needs of the biggest UK companies with excellent covenants. If the SME is to stand a chance of getting additional bank finance, it must not only be willing to pay a premium price, it must provide much more detailed management information, and better security. This could take the form of personal guarantees.
Effective cash-flow management: Because of the increased difficulty with bank finance, cash-flow management will remain absolutely crucial to all your planning. No doubt you would like to reward your staff for their forbearance, you may need to rebuild depleted stock levels, you will want to allocate resource to boosting your market share – but you must do this in the knowledge that the recovery will be weak and the availability of finance restricted.
Settlement terms: Just as you will continue to seek to maximise credit terms from your suppliers, so your customers will continue trying to eke out extra days’ credit from you. When business volumes were at best flat, you may not have been exposed to an expanding funding gap. As volumes start to improve, the increased margin will almost certainly lead to a need for additional funding – unless you can move the supplier/customer settlement equation further in your favour. Painful though it may be, offering greater prompt settlement discounts to reduce debtor days may resolve this.
HR: Without your staff, you have no business. Survival over the past couple of years will have included either wage reductions, reduced hours, or both. Now that the worst of times may be behind us, how do you compensate your employees without increasing the wages bill” The Enterprise Management Incentive Scheme may have been introduced at another time for a different purpose, but it’s ideally suited to the current climate. It’s well worth considering. Peter Rogol is a Partner at Goodman Jones, a leading firm of Chartered Accountants and business and tax advisers.