Preparing your Business for the Next Recession
There have been recessions in each of the last four decades in the UK, and every six in the US. Recessions are thus, in practice, a question not of if, but when, as we analyse here. Experts are almost united in predicting another one within the next two years.
Thus, small businesses should be preparing for the next recession. But most are not. In fact, surveys suggest that the vast majority only have enough cash in the bank to cover three months of overheads should something go wrong. That “something”, for many businesses, might be something as simple as losing one or two major customers.
In this article, we explore some of the measures you could take to shore up your business for the next recession without needing to use an asset protection mechanism like Trade Profit Stabilization (TPS). You could:
Demand Faster Payments
Cash flow problems – and their contagious nature throughout a supply chain – are one of the principal reasons small businesses contract or go under during recessions.
Even in normal market conditions, almost everyone gets paid too late. Indeed, research suggests that companies tend to work to a benchmark of ‘acceptable lateness’, which in practices means a week or so after an invoice deadline. So, you could shorten your invoice’s due date, perhaps by reducing it from 30 to 7 days. The money will still arrive late, but it will also arrive more quickly.
There are obvious challenges to this, however. One is that you’ll need to explain to your customers why you’re asking for more rapid payment without giving the impression your cash position is insecure, perhaps easier said than done. You will also, of course, need to set up a more comprehensive invoice chasing system.
Create a Cash Flow Forecast
Does your business have a cash flow forecast? If not, you’re amongst the majority. In normal trading conditions, such measures seem like needless bureaucracy, but when recession strikes, they can be extremely useful unless you are comfortable lending your business money from your own personal finances on an ad hoc basis when you dip into the red. While doing this occasionally is fine so long as it is kept under control, it places your business on extremely precarious foundations if it is your go-to option in a crash.
While online platforms exist to help you, creating and maintaining meaningful cash flow forecasts is a major effort of accountancy, but one which could be a lifeline in a recession.
Consider Alternative Finance
The majority of small businesses are reliant on external finance of some kind. If it is your own money, or a bank loan, then you are again on thin ice in a financial downturn. You could explore alternative options, including peer to peer lending, crowdfunding platforms such as Crowdcube, or even innovative services such as MarketInvoice, which allows you to sell unpaid invoices to raise capital.
Nonetheless, such challenger models – many of which are new and have not been tested by a recession – remain risky. They are also challenging to implement and sustain if dependency on them is established. The question of whether these “fair-weather funders” will remain liquid themselves in the event of a sustained recession, or in the event of a short-term liquidity shock remains to be seen. Those who actually lived out the credit crisis will have their own view.
Diversify
If you are dependent on one or two particularly large customers, you’re at great risk should one falter. Trying to develop new secondary markets to spread business across sectors, between countries, and across the year, naturally positions your businesses more robustly should there be a downturn focussed on one part of the economy, one country, or a ‘flash crash’ lasting a few months.
Diversification is also about changing working patterns. Perhaps, like many small business, you work on a project-by-project basis, where you require access to staff and finance at particular times. This can be precarious if you need to deliver a project during a recession. Moving to a model where you work on multiple projects continuously (and get paid for them on a recurring basis rather than through occasional large invoices) can mitigate this risk.
Diversification isn’t easy, of course. It can pre-emptively require moving towards working and customer-relations patterns, which seem inconvenient, artificial and unnecessary when the market is buoyant. But in the absence of other protection mechanisms, diversification can be a vital risk mitigator.
Unlucky? Or just Unprepared?
You might justifiably count yourself unlucky if the storm clouds roll in when your company is most exposed. But then, corporate history is strewn with the ashes of now-forgotten companies who were ‘victims of the times’. But, why run the risk of becoming one of them when there are ways you can hugely mitigate the risks?
You can pro-actively innovate your business using the suggestions above, but all of these come with huge challenges. But there are also other, easier, profit protection mechanisms you can put in place, which we explore here. However none of these are a complete replacement for comprehensive recession planning, although they can help a great deal. There is also a real question as to whether these mechanisms will themselves withstand a severe recession. TPS is specifically designed to be able to withstand any level of recession or liquidity shock. The fund and assets backing a TPS contract are segregated and locked so that, regardless of the state of the recession, they will always be available to support your business with much needed liquidity and profitability, measures which were (realistically) previously only available to large corporations.