1. Read the numbers
Dragon James Caan’s first company – recruitment firm Alexander Mann – recorded turnover of only £1,500 in 1991 when the market dipped. He says the best way to combat economic downturn is to understand what your cost base is and compare it to your revenue.
“When your revenues go up, your costs go up with it. When your revenues start to come down, your costs should come down. The problem is that most entrepreneurs allow sales to go down for quite some time before they respond – we’re eternal optimists. I did exactly that. Now, in every monthly board meeting I want to see the correlation line between costs and income, and they must match.”
2. Only raise funds you need
It may be tempting to raise extra money if you’re worried about access to cash in the future, but entrepreneur Marshall King says you should only take what you need. “If you raise too much money, you’re not lean enough or hungry enough, and you tend to defer those tough decisions when the downturn comes. You’ll then need to earn back all that extra money you spent”, he says. King was a non-executive director of a growing company called Magpie that raised half a million pounds – just enough to fund the business’s immediate development.
3. Act swiftly
Turnaround expert Anthony Holmes says it’s important to analyse your business model and risk profile. If you see a problem, or even a potential problem, deal with it immediately. He says: “Those who deal with it then and there come out of the situation in a better place.” Holmes also recommends getting an external opinion about the risks you’re facing.
4. Hedge your bets
Article 10 is a presentation design agency. Its MD, Lyndon Nicholson, says the company’s in the process of diversifying its offering. “We don’t think people are going to stop spending money, but we’re bolting on different services – if one area dips, we’re a bit more protected”, he explains. One way Article 10 is diversifying is by offering search engine consultancy services.
5. Understand customers
Opus Energy founder Charlie Crossley Cooke says that when the economy suffers it’s more important than ever to understand your customers and, in particular, their credit situation. “You need to know which customers are going to pay during an economic downturn”, he says. “We supply up to 40,000 businesses in the UK and there will be some customers who may go into administration. If you understand that in advance, you can price correctly.”
6. Concentrate on cash
Cash flow is king in times of economic strife. Andy Raynor, former CEO of accounting firm Tenon, advises: “Have a good cash management approach – it’s the most important part of the business.”
Elaine Chivers from consultancy firm ECCS agrees. “We’re going to tighten our approach to debt collection in order to improve cash flow”, she says.
7. Clamp down on credit
When money’s tight, it’s important to collect what you’re owed. It’s easier for bigger companies who can put the squeeze on smaller entities, but Holmes says SMEs need to be brave and play hard-ball with all their suppliers (including the big boys). “Tighten your credit arrangements. Make it difficult for big companies to put the screws on.”
8. Challenge gift-horses
Serial entrepreneur Robert Ashton says companies should be thorough in conducting due diligence on new clients. “Firms under financial pressure often seek out new suppliers as they reach their credit limit with their regulars”, he says. “Be wary of the ‘too good to be true’ big order.”
9. Be transparent
Millionaire plumber Charlie Mullins, who founded Pimlico Plumbers, says despite a slowdown in the economy, his £17m-business is still busy because it offers guarantees such as fixed rates to clients, advertised on its website. “Our charges are transparent,” he says. “People are made aware of them and I think that takes a bit of uncertainty out of the process.”
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