As 2016 begins, there’s plenty of reason for SME owners to be optimistic about the coming year. The most recent signs of an improving UK economy have driven feelings of optimism amongst entrepreneurs, and resulted in record numbers of business start-ups in 2015. But while the storm clouds of the recession may seem to be slowly disappearing over the horizon, it is always sensible to keep your small business prepared for future bad weather.
Already this year, there have been warnings of more difficult times to come as consumer demand in the Chinese stock market declined sharply over the New Year, and a feeling of uneasy expectancy spread into the European market over the likelihood of an eventual disinflation.
An eventual downturn, caused by the natural ebb of the economy, is inevitable, and it’s never too early to prepare your SME for the worst.
Below are 4 steps to help get you started with contingency planning through what could potentially be a challenging year for UK SMEs. “There’s no harm in hoping for the best, as long as you’re prepared for the worst”.
- Manage your cash flow
A lot of small businesses have a comparatively narrow margin for error, and even a small decline in revenue could have crippling effects. This is why it’s important to create a plan for producing short-term profit in times of difficulty.
Here’s what you could do:
- Prepare realistic (as well as worst-case scenario) revenue forecasts.
- Improve your cash-collection measures.
- Agree with your team on early warning signs to look out for e.g. a shrinking backlog and a downturn in customer-market indices, and come up with an immediately implementable counter-plan.
- Be ready to communicate with bankers and investors to keep them informed of the actions you’re ready to take to limit the damage of a downturn.
- Be ready to shrink to survive.
- Credit arrangements
Most small businesses have some form of a line of credit with a bank or a borrower to provide loans when needed.
The number one reason for businesses going out of business during a recession is because they simply run out of capital. Consider establishing new lines of credit, or increasing your current one because, even if you don’t need them now, you may later.
- Identify your strengths
Identify what your main strengths have been to date, and what distinguishes you as a brand. Next, isolate your highest-margin customers and ask yourself why you’re able to serve them so effectively.
In the event of a downturn it will be an extra line of defense if you can protect and build on your strengths to make yourself indispensable to your existing sales channel. Also, could you expand sales of new products and services? Is there any way that you could add value without increasing your costs?
- Where can you cut back?
Be prepared to comb through your current cost structure and identify areas, whether inefficient or dispensable, that you could cut back on.
The best time to think about this is not when revenues are already declining and margins are shrinking, as there’s a danger of making panic-decisions. Decide which areas you could afford to lose well in advance, and be prepared to take the clippers to them if things start to go south.
The list of things a small business owner needs to do to prepare for a downturn may require you some advanced managerial skills, and can seem daunting. But being able to navigate your company through a crisis may decide whether your company sinks or swims, so buckle up and get started!