Four ways you can prepare your business for an economic downturn – and survive it
Worried what will happen to your business if a recession hits? Here are four ways you can prepare your business for an economic downturn – and survive it.
In 2008 my business partner and I had what we thought was an incredibly successful business. Based on our experience as retail buyers, our company, Best Years, was less than five years old and already we were supplying high street retailers as diverse as Mothercare, Next and Harrods.
We saw the signs of the recession approaching but we were confident enough in our blue chip customer base, and our 20+ years’ experience in retail, not to be troubled by any doubts or fears.
But, by the end of 2009 we were as close to broke as a UK company can legally get. Our flexible working had disappeared and was replaced by something remarkably similar to running around like headless chickens.
Ten years later my business partner and I have what we consider to be a remarkably successful business. Based on our experience of getting through a recession and coming out the other side with a business which is both more profitable and more enjoyable, here are our four biggest tips to help you prepare for an economic downturn or recession.
1) Have a diverse customer base
It really doesn’t matter if there is going to be an economic downturn or not, being prepared for a reduction in sales is a valuable exercise which enables you to identify any potential opportunities or weaknesses you may have.
What we quickly realised when the recession happened was, although we had more than enough regular customers, they were all very similar. They were all large high street retailers who when the going got tough flexed their economic muscles and demanded more discount/longer payment terms/any and every other way to protect their margins.
If we had had a more balanced customer base we may have had the margin to keep some of our better customers. But instead we lost 75% of our sales in three months when we were unable to comply with their requirements.
Taking a long hard look at your business and asking friends and colleagues to comment and ask questions is always a valuable exercise. Doing a SWOT analysis can seem too corporate for a small company, but if you can identify your weaknesses you will identify opportunities at the same time.
Our customer base is now very diverse stretching from education specialists to museums, corporate gift specialists and independent retailers.
2) Create a cash flow document
We had been advised to have a sales forecast document, but as we could never tell when orders would arrive we didn’t understand how we could run a sales forecast or cash flow.
Our cash flow document is now at the heart of our business and is consulted for even the smallest of expenditures.
For the easiest of cash flow documents, simply tot up everything you have spent over the last year and divide it by 12. If you haven’t had your business for 12 months yet, just use the costs you have incurred and extrapolate them out.
This gives you the monthly costs you need to cover, and therefore the sales you need to generate every month. You need to include everything from VAT and corporation tax, to your website and marketing, travel and stationery.
It doesn’t matter if your sales and costs aren’t consistent every month. By having a record of what you spend and the sales you need to cover your costs, you will be able to look in to the future and see if and when your money will run out.
As you get more used to your document you can segment costs in to those you can’t avoid (tax) and those you could do without if you have a couple of quiet months.
It doesn’t matter how successful you are. Cash flow is at the centre of successful businesses and unless you can quickly and easily access capital it will be what influences whether you thrive or just survive.
3) Define who does what in your business
If your business is just you, then define the most important set of tasks you have and prioritise them. Is it more important that you create or sell? Is it better to be out raising your profile or in the office building your business?
We had loosely split roles between the two of us but when things got tough both of us scrabbled to do as much as we could to salvage the business. This meant that frequently some jobs would get done twice and others not at all.
Most people set up their own business because they want to be more in charge of their own time and resources. Unless you have a clear idea of what it is that needs to be done and how it should be prioritised then you could lose sight of this goal as you try to do everything in as quick a time as possible.
4) Know your USP
Identify what it is that makes you different from everybody else. Do you have something that makes you stand out from the rest? Could you move to being a niche business?
Our business changed from supplying traditional soft toys to only having knitted and crochet toys. We now have the largest selection of knitted and crochet toys in the UK. We are known as the authority in this area and although many companies have bits and pieces of knitted toys no one gets close to our range.
This means that we get customers through both recommendation and reputation without having to actively sell to attract customers. It also means that customers can’t try to negotiate prices or payment terms!
(Not sure what your USP is? You can learn how to work out your USP here.)
Your business CAN survive a recession
When a recession, or even just a change in your market happens, you don’t have to be Chicken Licken, running about forecasting the end of the economic model as we know it.
Just remember that even the very worst of recessions means a 5% shrinkage in GDP. There is still money about, and you can still run a profitable business. You don’t even have to be the best at what you do, you just need to be better than many.
No one can predict what will happen over the next year but you can run a profitable business in a recession as well as in a boom, you just need to be prepared and in control.
Gaynor Humphrey works for Best Years, a toy wholesaler and retailer specialising in knitted and crochet toys.