Protecting your business during an economic downturn

Don’t get crunched! Here are some tips for protecting your business in an economic downturn…

Keep on top of credit control…

When times get tough, it becomes more difficult to get payments from your debtors, and late payment can be a real issue.

According to a recent study, 59% of small and medium-sized enterprises are encountering more difficulties with outstanding debts since the beginning of the Credit Crunch – with 33% claiming that clients’ failure to pay on time risks the survival of their business.

Smaller firms are particularly vulnerable to the effects that late payment can have on cash flow, profitability, and ultimately the viability of a business. If you want to avoid falling victim to the ‘late payment culture’, consider the following strategies:

• Credit check customers – Minimise the risk of late payment by conducting credit checks on new and potential customers. It may be possible to obtain a credit report from a reference agency. Information may also be accessed through Companies House.

• Invoice promptly and efficiently – Distribute invoices in a timely manner to ensure the payment process remains as efficient as possible, and prevent unnecessary delays by addressing the invoice to the correct contact and department.

• Debt management – Make sure you have a clear policy for collecting debts and that customers are aware of it. Above all, ensure you enforce it. Pursue outstanding debts with letters and telephone calls, and threaten legal action if you have to. If your terms of business allow for adding interest on overdue accounts (they should, and at a good rate), add it. If your terms set credit limits, stick to them and stop supplying as credit limits are reached or bills go unpaid.

• Remain vigilant – By keeping an eye on your customers’ payment trends, you may spot potential problems before they develop into something more damaging. If customers are becoming increasingly hard to contact, or cheques are suspiciously delayed, it may be beneficial to investigate further.

Monitor your cash flow

Late payment, coupled with increasing supplier costs, can cause cash flow to stagnate. Being able to identify potential cash flow difficulties is therefore an important part of managing your organisation. It is better to take preventative measures rather than deal with the consequences further down the line.

A cash flow forecast is a simple tool that enables you to make educated financial projections and identify the likely peaks and troughs in net cash over the coming months. You can start with anything from a

sheet of paper to proprietary software, but you will need a clear idea of how cash will move in and out of your business over the months ahead.

Keep on marketing

As budgets get tighter, many firms have been forced to cut back on unnecessary expense where possible. The marketing budget is often the first casualty, but smart businesses continue to market through a downturn and position themselves to take full advantage of the upturn as soon as it starts.

In tough times the marketplace becomes more competitive – you may need to market more vigorously, not less. If you do not have a strategic marketing plan, now is the time to draw one up.

Maintain customer loyalty

In difficult times it becomes harder to attract new customers. Therefore, it is more important then ever to maintain loyalty amongst your existing ones. Consider ways of developing and rewarding customer

loyalty, such as selected discounts (especially for early payment), regular mailings or loyalty cards.

Beware of cutting prices

If receipts begin to taper off, it can be tempting to cut prices. But this can be a mistake. In a recession your costs will inflate and as a result you may be forced to raise prices to cover this expenditure.

Cutting prices can also have the negative long-term effect of devaluing your image in the marketplace. Remember that suppliers might raise their prices as well, so try to negotiate a long-term discount with them.

Look after your employees

While job cuts may be necessary in some circumstances, you should always try to retain your key employees: their strengths will help you through an economic downturn, and you will need them when

business picks up. You should use any dips in the market as an opportunity for key staff to develop new skills and coach newer members. Remember, employee motivation can rapidly deteriorate in times of economic uncertainty, so maintain good communication with your staff to prevent a decline in morale.

About the Author

These tips are extracted from 'Surviving the Credit Crunch'. You can download the complete pdf guide from the HFM website.

HfM can work with you to plan for your business future, offering advice on business management and tax planning and personal financial planning.