Here's the second in our series of Guest Posts on the recession. And it concerns the most important bit - the bottom line.
Nick Forsyth is a Partner with Lambert Chapman LLP a firm of Chartered Accountants and Business Advisers in Essex. (I can personally recommend them, they even have a blog). Here's what Nick's got to say.
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I’m not sure that I appreciate not being a recession virgin but if you saw Gilzean and Chivers play for Spurs you’ve been around the block before and maybe earned the right to shake your head at Bent and Pavlyuchenko! My experience of recession was gained in a small accountancy practice that has now grown to the £3 million turnover level and in which I am now a Partner. As I recall the “r” word started being used when large companies which no one expected to suffer began falling over without warning – a little like the Banks have done this autumn. Parkfield was one, a listed company in the video industry who took my favourite client with them.
In those days we had base rates of more than 10% all of the time so you could easily be paying 20% once small business rates were put onto base rate so interest cover was particularly important. Mortgages payments were also high through the rates of interest rather than the amounts outstanding and negative equity was a real problem for me and many of my peers.
How long did it last? Easily a couple of years. Once a business comes under pressure it can build up debt quickly. Costs continue unabated whilst income comes to a stop producing instant cash burn. Once Management have brought the situation under control at first break even is reached followed by small profits. In my experience it takes three times as long to pay back losses as it does to make them and this means the period of difficulty is extended over and above the length of the recession.
So what advice can I offer to you at this time? Firstly understand your costs. These will continue at their current rate unchecked irrespective of income and you need to understand which are fixed and which are variable. I often tell small businesses that as a rough rule of thumb most costs are 85% fixed and 15% variable so the opportunities for cost cutting are a bit limited. You may be able to reduce some fixed costs but there may be extra costs associated with doing that. Have you looked into what those might be? If you are an employer head count might become an issue. An early assessment of redundancy issues and cost is always useful should this become necessary.
Secondly, keep close to your customers and suppliers. We all recognise it takes a lot of effort to win new customers yet all too often we spend insufficient time with existing clients and all efforts into PNC’s. In good times one can keep income streams alive but when it gets hard those with the right balance will do better. Expect attacks upon your customers as with a downturn in their own incomes they may become shoppers, testing your rates and value for money. This suggests that you need to be upfront about bills with clients so that they are informed rather than ambushed.
With pressure on fees you need to be efficient in your design process. In a strong economy this is less of a problem but as things slow and customers shop you may be under pressure to deliver quicker to produce a good recovery on hours spent on the project. Clearly quality should not be sacrificed and pricing needs to reflect the hours required to deliver this before deciding your pitch price and what recovery rate this will be. A good costing system can help to identify levels of profitability on jobs.
Thirdly, in testing times profits are important but cash is king. The Banks have brought this home to us very recently; clearly profitable businesses but without cash rushing to the Government in a state of panic. A cash forecast is a wonderful thing but it is only a guess. Having committed yourself to this guess and maybe secured an overdraft facility based upon it you need to compare your actual performance to it and be able to see how you might vary from it in the coming months. This does not have to take hours to do, but once done it allows you to plot what steps you might need to take to keep onside with your Bank.
Fourthly, take advice if you are unsure. That’s what the accountant is there for; to help you assess your position and provide options for you to choose from. As an example, if you cannot pay the taxman don’t wait for him to come calling. Talk to your accountant who should be able to suggest the types of payment you could make to spread the bill. My firm negotiates on behalf of those clients who need that help and know what line HMRC are currently taking.
Before providing the Bank with bad news talk through your message and reports so that you are happy they are hard to turn down rather than hitting the wall with a “NO”. I would expect to know a local banker and be able to discuss the plan with them if required to ensure that it gets a fair hearing upon presentation.
And lastly, never give up. I expect to lose some clients during any slowdown but I hope to win some new ones to replace them. Don’t allow yourself to lose confidence - you can do this by being proactive. And if things look very bleak remember something can always turn up as a few Sundays ago showed us with a win against Bolton and goals for both Bent and Pav!
Nick Forsyth is a Partner with Lambert Chapman LLP a firm of Chartered Accountants and Business Advisers in Essex who delivers straight talking advice to his clients and is involved in the Firm’s marketing as a speaker and author in the firm’s publications, website and blog. He can be contacted at firstname.lastname@example.org quoting “Noisy Decent Graphics” for a reply to any questions you might have.