Planning to Reduce the Impact
There is a lot of uncertainty at the moment (May 6, 2008) with much talk in the media of an ‘impending economic downturn’. While the phrase ‘recession’ seems to be close to many people’s lips, it is being muttered in hushed tones rather than being shouted from the rafters. In the U.S. they are ‘not in a recession’ according to the U.S. Commerce Department (April 30th), in an ‘awfully pale recession’ according to Alan Greenspan (May 5th) and in a ‘recession’ as Warren Buffett defines it (May 5th). For now, in the U.K., at the very least, we are experiencing a downturn/slowdown/worsening of economic conditions. (You can take your pick as to which euphemism is most applicable.) Regardless of the word play, one thing is clear; many economic indicators are predicting flat or negative growth for the next year.
What is clear in the U.K. is that there have been significant increases in recent months in the costs of staple foods, oil, oil derivative products, and those services heavily reliant on oil, such as transport and heating. All of this change has resulted in higher business costs, a greater cost burden on the average consumer and reduced disposable income. Add the ‘credit crunch’ to the mix and it is clear that the economic conditions are going to be a lot tougher in the months to come.
So what does all of this mean? The bottom line is it will mean less money in people’s pockets and less access to credit as banks tighten their belts. Given the above, it seems prudent to consider some actions that will help ensure that your business is able to adapt quickly to less favourable economic conditions if and when they ever do arrive!
How vulnerable is your business?
The first thing to consider is how ‘recession-proof’ your business is.
Is your product generally considered a ‘necessity’ or a ‘luxury’? Is your product a ‘staple good’? In pure economic terms, ‘staple goods’ tend to be those where demand stays relatively constant even as price increases; for example, cereal-based products such as bread, available year-round, are staples. Understanding the nature of your product and who consumes it will give you a better feel for the likely future demand for it.
If your company is business-to-business (B2B), you need to consider how the wider economic changes are likely to impact the demand for your products or services. It is also worth analysing your current customer base. Are you over-reliant on a small number of customers? If yes, consider how best to diversify your customer base. If your product portfolio is too narrow, seek ways to increase internal innovation so you can diversify your income streams in the short term.
All of this analysis will allow you to better understand your particular vulnerabilities and help you to craft strategies to reduce the impact if a full-blown recession kicks in.
Revisit your sales forecast
As you’ll gather from the above, it is necessary to revisit your business plan (in particular the sales forecast) to reappraise the core fundamentals. When people draw up a sales forecast, they are typically basing their figures on the economic conditions of the time. As these conditions change, the assumptions on which the sales forecast was based will have changed. Hence, assuming your business plan was written six months or a year ago, it is necessary to revisit the sales forecast and to reassess the figures, probably downgrading sales predictions in the light of the changing circumstances. You will need to analyse your projected sales and assess the likely affect a recession would have on them. Perhaps you draw up a number of scenarios. Once you have done so you will have a better feel for plausible outcomes in the year ahead. The revised business plan will also help you identify some other areas in need of immediate focus: cost base, proposed marketing spend, resource deployment, etc.
Alongside the risk of reduced sales numbers, credit management tends to be the next biggest issue during recessions: debtors take longer to pay, or worse, some debtors go out of business. Hence it is prudent to reassess your cash position. If you have a high percentage of sales on credit you will need to reconsider the payment terms, ensure you invoice immediately and maintain contact with those who owe you a lot of money. There is no need to panic; it is simply opportune to revisit all elements of your credit control system from invoicing, to bank overdraft facilities, to the debt collection process you have in place, to make sure that you are on top of your cash flow.
Run down stock
As you redo your business plan, take time to review your stock position. You may want to ‘restructure’ your balance sheet, to reduce assets consisting of stock and debtors (accounts receivable) and increase cash/bank reserves.
Every cloud has a silver lining
It is also worth remembering that every cloud has a silver lining, and that how you behave will significantly impact your chances of riding out the recession. For example, you may pick up better advertising rates as other businesses slash advertising budgets. For instance, Michael O’Leary of Ryanair claimed he “would welcome an economic slowdown across the continent that would make consumers more cost conscious and therefore choose Ryanair.“ The bottom line here is to remember that a recession does not need to be all doom and gloom and that careful planning can help you mitigate against some of the key issues that can impact your business.
Economic indicators are historic in nature. The economic definition of a recession requires two successive quarters of negative real economic growth. This can obviously mean a six-month lag in the announcement of the arrival of a recession. However, there are many more factors that give clear indications as to general economic well being. This article is based on the author’s reading of these various indicators and the recommendation that a review of your company’s business plan is indeed timely. If you do not have a business plan, there are strong grounds for doing one now as changing environmental conditions are likely to result in more difficult times for everyone. A business plan can help you reassess key activities, focus minds (and indeed resources) and help you manage credit more prudently.Recessions have always been part of the economic cycle and are typically short-lived. It is not a time for rash decisions, but time for a brief pause to reassess ‘the current’ so the path to ‘the future’ can be planned with more certainty.