How to manage your business effectively in a downturn

What can you do to safeguard your business so it can thrive and not just survive?

Here are five ways to help insulate your business against the worst of the downturn:

1. Regular cash flow reviews

To begin with, every business should be in the habit of producing regular short term cash flow forecasts to identify potential future pinch points in advance to give themselves more time and therefore more options to remedy any issues. Cash flow is the lifeblood of any business and in these uncertain times it is particularly important that any forecast is prudent, realistic and honest. It’s best to envisage the worst-case scenario so that you can be fully prepared as working capital requirements are likely to increase in a recession.

Furthermore, it is important that businesses regularly review and update their forecasts to reflect changes in trading conditions, underlying assumptions and interest rates. Ideally this should be done on a weekly basis and if the forecast shows that there is a shortage of working capital then prompt steps should be taken to cut costs, seek support from creditors by way of time to pay arrangements or consider raising additional finance.

2. Keep management information accurate and up to date

Some business owners confuse being busy with making money and whilst this can often be true, it is not always the case!

Every business requires accurate management information to identify issues such as profit margin erosion caused by increasing costs. Equally important is a regular review of the balance sheet to consider not only the bank account and debtors/work in progress but also liabilities or bad debts and how they may impact on working capital.

3. Think credit control

It’s worth considering how you approach credit control and review current systems to make sure they are sufficient in these difficult times and if they are not consider updating them. This may include looking at credit rating software but be aware that information in the public domain can often be out of date so consider regularly requests for up-to-date financial information from key customers.

If you do not have a credit controller, consider recruiting one as they are worth their weight in gold by liaising with clients to ensure prompt payment, identifying problem customers and placing default accounts on stop promptly to minimise potential exposure to a loss.

You may wish to review your terms and conditions that clients sign and if you supply goods seek legal advice to add or improve a retention of title clause which may help mitigate any future loss. You may also want to consider adding a personal guarantee from directors opening company credit accounts. Where there are significant concerns about a customer’s ability to pay it may be appropriate to issue a pro forma invoice and get paid up front.

4. Consider any supply chain risks

As well as customers it’s important to also review your supply chain resilience, consider which parts are essential and any risks which may cause a break in supply. Where issues are identified consider building trading relationships with alternative suppliers. Where possible avoid paying for goods in advance and if a deposit is required with order seek confirmation that these funds are held in a ringfenced designated client account so they may be returned in the event of no supply.

5. Seek professional advice

Regardless of the size of your business or the severity of financial distress, it is always advisable to seek professional advice as early as possible. An early consultation is more likely to be successful as there are more options available.

At PKF Francis Clark we have a very experienced, qualified and friendly business restructuring team who can provide tailored advice to help your business survive and grow in tough times. Please do not hesitate to get in touch, the initial conversation is free and we’re keen to help you.