Any other business

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…to survive an economic downturn

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1 Read the numbersDragon 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 needIt 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 is non-executive director of a growing company called Magpie that’s recently raised half a million pounds – just enough to fund the business’s immediate development.

3 Act swiftlyTurnaround 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 betsArticle 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 customersOpus Energy MD 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 cashCash flow is king in times of economic strife. Andy Raynor, 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 creditWhen 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 turnaround expert Anthony 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-horsesSerial 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 transparentMillionaire 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.”

10 Focus on growth areas“We’re focusing on growing both the organic section and the male grooming side of the market. Both are tipped for growth,” says Simon Tate, the founder of Kew Health and Beauty. “Look at sectors most likely to survive economic downturn.”

11 Change the business modelBusiness model not working? Change it to one that’s proven to work. That’s what angel investor Marshall King did when he was running Improveline at the turn of the millennium. He says: “Like many dotcoms in those times, the initial model we started with didn’t work. We had to be adaptable and creative. It’s easier to do something you know works, but do it better than the competition.”

12 Go cheap…Stephano Passantino’s company Lastseason.com offers heavily discounted clothes online. Even though the venture is still in the early stages of development, Passantino is confident about the future because of the low cost of his stock. “People, especially men, aren’t too bothered whether a piece of clothing is brand-new or last season. A hoodie’s a hoodie to a man. Most sites have got a sale option, but they’re not as cheap as we are. We buy at such a price that we can sell it on to the customers and make the same margin as a retail shop.”

13 …Or go upmarketLuxury goods are often, perhaps perversely, the last to suffer when the market takes a dive. Simon Tate is hopeful his beauty company will be protected from crunch time because its client base is “nicely spread” in the upper mass-market and prestige sectors. “Our experience suggests that the demand for luxury goods doesn’t necessarily tail off,” he says.

14 Get the job done quicklySpeeding up the time it takes to complete a job can benefit your business in numerous ways. Charlie Mullins from Pimlico Plumbers says: “We’re cutting the price of a job to get it done quicker and make as many savings as possible on the labour side.”

15 Get friendly with your bankIt’s important to be upfront with your bank about your financial situation but realise they may be loath to lend you money given the credit crunch. Turnaround expert Anthony Holmes has this advice for those companies with borrowings of less than £30m: “Get all loan agreements together, read them and find out what the covenants mean if you get into trouble. Once you know what the banks know about those covenants, you’ll have some idea of the strategies you might employ.”

16 Tighten your marketingMarketing is often the first budget slashed when belt-buckles are tightened. Article 10’s Lyndon Nicholson says his company is helping clients to tighten their marketing plans but he’s also focused on making the most of every marketing penny his own company spends. “We’re switching a lot of focus online, and we’re not doing any magazine marketing, which is where we normally advertise when cash is more free-flowing. In the boardroom, marketing is immediately seen as the area where the money you’re spending can be cut without a detrimental effect on the business in the short term.”

17 Concentrate on customersRetaining existing business is key, according to Susanna Simpson, founder of PR agency Limelight. That means treating your existing customers like royalty. “All of our clients have account teams from Limelight attached to them. These teams are talking to them on a day-to-day basis. In particular, we need to make sure the account teams are hitting deadlines, delivering everything the client wants and always exceeding their expectations.”

18 Sort out your energyEnergy prices are continuing to rise on the back of record-high oil costs. Opus Energy’s Charlie Crossley Cooke says businesses should think about fixing the price of their energy contract for a couple of years. “This gives businesses budgeting availability. Larger companies can also opt to buy power whenever they want throughout the period of the contract. It gives them flexibility.”

19 Watch your competitorsAndrew Pattenore, founder of estate agents Parsons, advises keeping an eye on competitors to see how they’re responding to the slowdown. You might have to do the same or face losing your customers. Pattenore says: “Even in the London property market, estate agents are reducing their fees to attract custom. In order to survive the current conditions, we’ve had to do the same.”

20 Go to staff for adviceYour staff can be a good source of ideas to help improve the business. “It’s important that staff are made aware of the company’s future plans – they may have useful ideas to help generate business,” says Elaine Chivers from ECCS. But it’s important you don’t cause your people undue worry, she warns.

21 Don’t stop innovatingPaul Samrah, a partner at accounting firm Kingston Smith, says innovation is still important, despite cutbacks you may have to make. “For SMEs to compete against the larger, more established enterprises, they still need to invest in innovation,” he says. “However, in order to maximise returns on investment, businesses need to understand which areas of innovation are most effective for them. SMEs need to align their innovation efforts with their overall business strategy.”

22 Make everyone a salesmanPR guru Susanna Simpson says her agency, Limelight, is encouraging clients to ensure their employees are all “brilliant ambassadors for their business” to help drum up sales. “Every employee can have an influence on an existing or potential client. They’re all sales people, really.”

23 Look at staffing

Tenon’s Andy Raynor recommends checking the terms of employment of all your staff and recognising who your “stars” are before you consider laying any of them off. When it comes to recruiting new people, Head Resourcing’s Paul Atkinson says: “We’re being slightly more cautious this year. In 2007, we had a 45 per cent head count increase, but this year that figure is set to flatline.”

24 Be flexibleMany SMEs have the advantage over their larger rivals because they’re better able to react quickly to changes in the market or the demands of a customer. Susanna Simpson says: “I set my business up in 2002 towards the end of the downturn that followed 9/11. I was able to win business because I could offer more personal service to my clients. Also, if you’re adaptable, you’re not bound by a set of numbers you’ve got to hit.”

25 Start a new company……But only if you know what you’re doing, advises Paul Atkinson. He started his recruitment firm, Head Resourcing, in the dotcom crash of 2001. “A downturn can be a good time to start a business if you’re in an industry sector you’re familiar with.  Business is cyclical – there are always booms and busts.”

26 Plan for the worstIt may seem pessimistic, but Anthony Holmes says companies must consider the worst-case scenario. “Approach your problems rationally and have back-up plans in place,” he says.

27 Don’t panic!Economic slowdown doesn’t mean recession. The textbook definition of recession is two consecutive quarters of negative growth and we haven’t hit that yet. Serial entrepreneur Robert Ashton notes: “Slowdown does not mean stop. Providing you can weather a storm, you’ll be fine. Don’t talk recession up; it might never happen.”

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