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15th July 2009
CAT.204
Rebuilding a Business (Birmingham Post)
Business confidence may have ebbed away over the past six months as the full extent of the recession starts to hit home, but businesses can still come out the other side stronger than ever, says Graham Mold, Director with Catapult Venture Managers.
Few of today’s business owners were around in the last recession which began in the second half of 1990 and was officially declared in January 1991. But some of the UK’s most successful businesses have been borne out of that particular recession: a good example of this is technology company ARM Holdings. So this is a time to work out how to position your business in order to come strongly out of the recession, not just to bury your head in the sand.
The current downturn in the global economy is largely the result of the banking crisis – emanating from the US – and sending tremors across the world’s financial markets.
A reluctance by the banks to lend – although there are signs of some activity now – has created problems for businesses looking for support in these tough times. However, there are clear signs that those management teams which made judicious cuts early on in the process – as early as autumn 2008 - are benefiting from doing so. Just like cancer, early surgery is key.
Certainly, this time around there were a noticeable number of early redundancy announcements, as well as other cost cutting measures in a bid to ride out the predicted stormy waters ahead. Companies clearly realised that there was no point hanging on, which was not the case in the early 90s. Improved communication/technology is probably responsible for that.
Many of the corporate financiers I have spoken to believe that there is likely to be a second dip in the state of the economy, which in turn would result in more redundancies. We all hope that won’t happen, but it is sensible to assume that it will.
However, businesses rarely get into trouble solely due to external forces, although the withdrawal of bank facilities may fall into this category. In the good times companies can make money in spite of poor management control over finances, but then become somewhat exposed when their market contracts and their order book starts to diminish.
So good management (and making the hard decisions quickly) become even more important in a recession. It is imperative for management teams to make an honest assessment of their current position rather than opting for an optimistic approach that could be extremely damaging to the long-term health of their enterprise. Work out a sales forecast for the next two years - taking a pessimistic view - and then knock 25% off!
By taking optimism out of the equation a business can build from a lower cost base upwards, rather than wasting time, money and resource on a business which is being looked through rose coloured spectacles. The extra months of cashflow this can give you can be the difference between success and failure. Losing employees is hard, but not as hard as losing the whole of the business.
Any companies that haven’t already closely examined their cost base should do so immediately and look to improve cash flow wherever possible including invoicing on time and collecting outstanding money. And those that have already done it should do it again!
Clearly, it is going to take a while before the banks start to lend anywhere close to their levels of even 12 months ago and, whilst there is possibly a little more business confidence around than earlier in the year, any interest rate rises will slow down any recovery.
Any firms finding themselves in difficulty should keep suppliers informed of the situation and, if you have an investor on board, keep them abreast of the situation so there are no surprises further down the line.
Whilst Catapult invests in enterprises that require cash in order to move forward to the next stage of development, we are not here to provide ‘stop-gap’ funding to struggling businesses just to enable them to survive the next ‘cash-flow’ problem, unless of course they have a plan on how they will change to survive and prosper.
Many businesses that deal with the current situation well will almost certainly be in an excellent position when the upturn comes….increasingly people I speak to don’t believe this will even happen in 2011, it’s more likely to be in 2012! A significant amount of the public spending, which is keeping some industries afloat right now, will almost certainly dry up after the next election, which will potentially prolong the recovery in some sectors.
By planning for the worst then anything else is a bonus. One thing is for sure, the old adage ‘cash is king’ is never more applicable than at times like this!
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For further information contact Graham Mold at Catapult Venture Managers on 0121 616 0180 or 07768 148187 or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322.
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