Running a Business Through Periods of High Interest Rates, High Inflation and Low Growth
The UK is braced for a series of economic shocks this winter. Interest rates are on the rise; inflation is predicted to be 18.6% by early next year and fuel costs, as we all know, are sky rocketing. Consequently, discretionary spending will be hit hard. Businesses need to be preparing and planning for recession. For some, there will be opportunities but for many, it will be a question of preparing for deep cuts in costs and revenues. Cash will be king.
At Dorset Business Mentors we have more than 100 mentors with decades of business experience all of whom have lived and worked through recessions in the past. They are available to coach, help and support Dorset businesses in planning and preparing for the looming recession. They can help to see the opportunities as well as the challenges which are coming.
“Those who don’t know history are destined to repeat it.” – Edmund Burke
“The biggest difference back in the ‘80s was that the energy market had not been deregulated and prices were controlled. There also wasn’t a 24-hour news cycle constantly telling people how bad things were. We just got our heads down and kept working.” - Anon., Dorset Business Mentor
Even by the most conservative estimates, Dorset Business Mentors can draw on 3500 years of business and life experience. So we wrote to business mentors asking for their experience and insight into running businesses through periods of high inflation, interest rates and low growth.
While there are no silver bullets, several themes emerged as useful principles and starting points for substantial discussions between a business and its mentor. Central to these themes was the principle of meaningful engagement with the problem at hand. Do not hide behind less important ‘urgent’ tasks, or make the mistake of thinking it can wait until next month. The time to act is now. Whether it is getting to know your data and what it’s telling you better, reviewing your cost-base and shopping around for more cost-effective alternatives, or sifting and weeding out the less-profitable work/clients, you can take steps every day to insulate yourself against the worst.
These are undeniably testing times, but take heart: there are always opportunities, even in a recession.
Cash Is King
The importance of enough cash to bridge the gap between expenditure and invoices is vital. More than one mentor quoted versions of the well-worn phrase: ‘turnover for vanity, profits for sanity, and cash is reality.’
Another observation was: ‘keep the focus on cash and close communication with lenders, and be willing to challenge all costs.’
As unglamorous as it is and however we might try and avoid it, admin. is a friend indeed: ‘ensure all invoicing goes out on time and keep tight control of all debtors to ensure positive cash flow at all times.’
We have access to more data now than ever before. Use it: ‘Have meaningful MI, particularly cash flow forecasting, so you can enter discussions with suppliers, landlords, bankers etc early whilst an issue is still on the horizon rather than in your face.’
Focus on Essentials
Now is a good time to review the areas of your business that makes you money and prune back those parts that don’t: ‘be more ruthless in maximising margins and ditching non-profit making customers’
It is also a good time to think about projects you are working on, and whether you can still afford to do / not do them: ‘Review of all projects and resources required to complete.’
Redundancies
Awful to even have to even consider redundancies, but for many businesses, this will be the unwelcome reality: ‘the last resort was always redundancy but it was inevitable in the three recessions I went through in my business. Ensure the proper redundancy consultation process is actioned early. Do not leave till the last minute as this can impact cost savings on redundancy payments and salary costs.’
But there may be other ways: ‘Potential clients stopped using our services. There was a haemorrhaging of cash. The financial picture was explained to staff and two options were put forward: either around half would be made redundant or everyone took a substantial pay cut in the hope of better times in the future. Each staff member was interviewed about their financial affairs and asked what was the minimum salary he/she required to “live”. This was then fixed for as long as the crisis lasted. At the same time as these salary cuts were implemented, all surplus manpower (and because of the slowdown there were many underemployed) were made part of a focused marketing/selling strategy to generate new business.
The recession gradually came to an end and the staff reverted to their normal salaries. Only a few staff left during this period of austerity.’
Or how about this: ‘An old banker’s favourite is this – ‘if you lived high on the hog in the good times you have to cut your expenditure fast and hard in the bad times to ease the strain on the business.’ How many people have I seen do this? Nowhere near as many as should have been done! We all get used to a standard of living and gear up accordingly. Adjacent to this if you’ve taken money out in the good times and you believe the business has a future then you have to be prepared to put some of it back in.’
One Mentors Checklist
‘In my own experience, it has to start from the top & then take the following actions:-
1. Senior staff & directors should volunteer to take a substantial pay cut;
2. All expenses be scrutinised & cut back where possible;
3. Travel should be reduced as much as possible;
4. Talk to the landlord to see if you can get a rent holiday;
5. Explain to your bank the situation you are in, with a plan on how you’re dealing with it;
6. Work out some payment schedule with your creditors;
7. Chase your debtors for their payment situation;
8. Scrutinise very thoroughly prospective pipeline & re-prioritise effort for closure;
9. Keep staff up to date with the situation;
10. If this is not enough then look @ cutting staff.’