What sets business owners apart is their ability to turn challenges into opportunities.
The Bank of England has forecast that the UK may fall into a recession later this year, with the economy remaining sluggish throughout 2023.
Anyone operating a business must prepare for tough times ahead. In this article, we discuss the steps you can take to help you navigate the next 18 months to prepare for an economic downturn.
What is a recession?
A recession is defined as the economy getting smaller for two consecutive quarters. During a recession, businesses struggle to grow and may have to make people redundant or freeze hiring new employees. During this time, graduates can find it particularly hard to find employment and youth unemployment soars.
What happens during a recession?
There is no definitive sign that a recession is occurring. Still, NBER’s Business Cycle Dating Committee looks at the following indicators when deciding to declare a recession:
- Personal income drops; Employers slash hours or reduce their workforce. This occurs mainly in the middle and lower classes, who would see their personal finances affected.
- Job loss; Thousands may lose their jobs during the recession
- Decline of manufacturing activity; In response to the rising cost of raw materials, businesses usually cut back on production during a recession
- Retail sales decrease; As people have less money to spend due to the financial situation and high inflation, their consumption habits would change; for example, they will reduce the use of credit cards
What can I do to prepare my business for a recession?
The more you prepare your business for an economic downturn, its chances of thriving in a recession improve.
Below are our top five tips:
1. Analyse your overheads and costs
One of the smartest ways to prepare your business for a recession is to look at your overheads and costs and make cutbacks where possible to keep your profit margins up.
Some fixed costs include rent, staff and tax payments. However, activities such as marketing and advertising, administration and utilities can be minimised and some cases, outsourced.
To continue advertising and marketing your business, you will need new customers. When budgets are tight, rather than spending big on marketing activity, it could be worth looking at cheaper alternatives; for example, instead of spending heavily on paid advertising, you could try to write blogs or increase your social media activity to generate organic inbound customers.
Increased energy costs will hit businesses hard, but minor changes can result in significant savings.
For example, a single computer and monitor left running 24 hours a day cost over £50 a year. When staff leave the office, get them to switch off their machines at the wall, this will help you save in the long term.
This and other energy-saving habits will also reduce your business's carbon footprint.
2. Manage business debt
One of the main reasons companies become insolvent in a recession is that they lack the necessary cash flow to service their overheads and debts. Therefore, you must minimise your borrowing and existing debts as far as possible.
If you’re currently in a position to overpay your current debts, it is a clever idea to do so. This will provide some breathing room during the recession. If you're struggling to pay debts you should consider options like invoice discounting or invoice factoring to help. These options can pay what is owed on your invoices from the invoice discounter/factoring company, in return for surrendering a small percentage of the collectable funds.
If you're a supplier, you may reluctantly want to consider ways of enforcing debts. One such enforcement is the use of statutory demands. This is a drastic remedy but essentially means that if the debtor does not pay the debt or reach a payment arrangement with the creditor within 21 days, then the debtor could potentially be wound up. There are debt collection agencies which can help you administer this process.
If you're on the receiving end of a statutory demand you must do something about it – you can not just ignore it. When dealing with your own debt, consider whether there is a genuine reason why the debt is not actually owed and it can be disputed or if you have a counterclaim. If the debt is genuinely disputed the courts may set aside enforce a statutory demand.
3. Create new revenue streams
Diversifying your business's products and services can protect you in a downturn.
If demand for one of your products or services reduces, having multiple offerings means other revenue streams can support those struggling. It all comes down to the old cliché of avoiding putting all your eggs in one basket.
4. Rightsize your staffing requirements
While downsizing involves reducing the number of employees to increase profitability and reduce overheads, rightsizing your business guarantees your business has the correct number of people with the desired skill sets and experience to ensure it can meet growth targets and fulfil expectations.
This may involve increasing your number of employees in specific business areas.
If rightsizing involves making redundancies, you must follow the correct statutory procedures, is a good idea to seek legal advice. Otherwise, you risk not only former employees bringing claims in the Employment Tribunal but also low morale and motivation amongst existing staff, neither of which is conducive to running a business in a recession.
5. Reviewing commercial property needs
Alongside staffing costs, commercial property rent is one of the largest expenses for businesses, many of whom will already be making catch-up payments following the coronavirus pandemic.
If your employees work from home two or three days a week, you may find that the commercial property space you are currently leasing is more than you need. If this is the case, it is worth investigating your commercial lease agreement to see if there is a break clause which will allow you to end your tenancy before the agreed fixed term expires.
Depending on the type of property you lease, there may be opportunities for subletting part of the building or even assigning the lease to a new tenant. Both these options could save you considerable money on your commercial property costs. However, neither should be undertaken without first seeking professional legal advice.
Commercial property legal advice
6. Create a crisis management plan
A crisis management plan outlines how your business will react if a crisis occurs, so it will be the last action point that consolidates all the activities above.
Whilst analysing your business’s overheads, debt management plan, revenue streams, and staffing requirements, you and your senior management team need to look at the findings and create a recession plan.
This will ensure you have the people and processes in place to deal with anticipated and surprise recession-related challenges and opportunities.
7. Check your supplier agreements
If you're a supplier entering into new agreements, make sure you;
- Have clear credit terms in your agreements and credit limits
- Set contract performance targets enabling you to terminate early if the contract isn’t working
- Use retention of title clauses so that you still own your goods till they are paid for and mark your goods as the owner, so you can re-possess them if you need to
- Provide for contractual interest on late payments
- Include clear termination rights for breach of the contract or if the other party experiences financial adversity such as the appointment of an Administrator
- Try and get security for what is owed to you and perhaps a guarantee from a parent company or owner, or a registered charge
- Include time and cost-saving remedies such as Alternative Dispute Resolution (ADR) for sorting out disputes rather than applying to the Courts – remedies like mediation are much quicker, cheaper and less stressful
- Check your existing contracts for all these protections too
If instead, you're a purchaser needing to modify your agreement with a supplier, there may be an opportunity to renegotiate a contract, as in a recession suppliers would rather retain your business at a reduced rate than lose it altogether.
It may also be that you are entitled to terminate the agreement. This might occur when;
- The supplier is in breach or has committed some other failure (e.g breach of statutory duty), or a tort (being a failure to take reasonable care in fulfilling a non-contractual duty to you)
- There is a Force Majeure Clause in the contract which might help you
- There is some other statutory reason why the contract can be set aside or liability minimised (e.g Unfair Contract Terms Act)
8. Deal with liquidity issues
When times are tough the waves of debts and payments can become unmanageable for a business. This can be very stressful. It may not be the end though. There are legal remedies that can help you work through liquidity issues without killing the company;
- A Company Voluntary Arrangement (CVA) would allow your business to continue while potentially helping get creditors off your back
- A Scheme of Arrangement with Creditors under the Companies Act 2006 could bind creditors even without notice
- Entering into Administration will provide a moratorium against debts
- A Pre-pack Administration helps leave current liabilities behind and may give you the chance to buy the company’s assets back out of Administration
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There are always businesses that thrive during tough economic times. With careful planning and intelligent, friendly advice from experts, who have taken the time to understand your organisation and market sector, you can put your company in a position to take advantage of the opportunities that will present themselves over the coming months.
LawBite has helped thousands of businesses achieve their commercial ambitions. To find out how we can help you create and protect your business during a recession, book a free 15-minute consultation or call us on 020 3808 8314.
