How to Survive an Economic Turndown

In the current global economic climate, small and medium-sized enterprises (SMEs) will probably be concerned about the consequences for their business. It will be a case of the survival of the fittest. This fact sheet on how to survive in the current economic climate provides some useful pointers if your business is suffering.

SMEs need to keep a tight rein on cashflow, make sure they can pay and be paid on time and keep a dialogue open with their bank.

Below is a list of what companies should focus on. This may seem an exhausting list, but it is important to address these issues because they are all interlinked and fundamental to business success.

Managing Money

1. Good financial planning is crucial - don't be scared of facing and making difficult business decisions. 
2. Start questioning early your credit facilities with UK retail banks. 
3. Maintain a meaningful dialogue with your bank - and also with your accountant if necessary.
4. Review your bank charges. Could you switch accounts and find a better deal with a new bank? Could your current bank give you any special deals as a loyal customer? 
5. When it comes to rolling over banking facilities, watch out for hidden charges and factor those into financial planning if necessary.

Cash Flow

1. Review all your direct debit arrangements - for the business and for your personal finances.
2. Try to clear credit card debt. But if you use them, try to pay without incurring interest and pay off balances before charges are incurred. 
3. Chase your cashflow and if you can't make payments, then let your creditors know why and when they can expect a payment. 
4. Pay special attention to cash flow forecasts and to monitoring cash flow. Ensure management accounts are up to date, and that all key financial reconciliations are done, reviewed, and outstanding items cleared. 
5. Tighten up credit control, cash collection procedures, and treasury management.

Looking Ahead

1. Look carefully at your forward order book, and the timing of future orders. 
2. Consider carefully current and future customers and their ability to pay - do not simply rely on credit ratings. 
3. Pay particular attention to investments and major capital expenditure. Appraise rigorously and consider the extent to which such items can be rescheduled. 
4. For those businesses which import/export, consider foreign exchange hedging and where this could be relevant to your business. 
5. For December year-ends: be clear about stock and "work in progress" valuations - get early audit agreement to valuation principles. Do the same for all "fair value" items on your balance sheet. 

Staffing Issues

1. Look critically at staff requirements/recruiting strategy. Instead of taking on new staff, you could consider paying for more paid overtime. 
2. Consider, where relevant, temporary or fixed-term assignments, but make sure you have weighed up the pros and cons against full time recruitment. 
3. Be cautious in awarding pay rises and in setting up staff incentive schemes. Ensure such schemes relate as much to profitability and cash generation as much as to growth. Be alert for performance distortions related to incentivisation schemes. 
4. Critically evaluate your own financial drawings from the business. Are they appropriate in the light of current and future profitability and cash generation? Cars? School fees? Home improvements? Holidays? Insurances? 
5. Revisit the Risk Register as a matter of priority. Are all risks included, particularly financial/liquidity? Are risk mitigation measures still valid? Are mitigation owners being proactive in their responsibilities?
   

Fact sheet based on material supplied by the Chartered Association of Certified Accountants. 

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

Prime Chartered Accountants
Fact sheet published June 2008