lessons to learn from a recession

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lessons to
learn from
a recession
By: Kate Pritchard Illustration: Jonny Hannah




It’s not too late to learn from your recession
shortfalls and improve your business. Tear this
article out and save it for the next downturn.
1 Buy your rivals                       2 Fix your forex
Ed Reeves, co-founder of                Before the recession took hold
Moneypenny, the outsourced              and currency fluctuations became
reception specialist, wishes            volatile, businesses involved with
he’d acquired floundering rivals        import or export should have fixed
during the economic dip: “It was        their exchange rates with a forward
December 2008. The bankers were         contract and protected their business
running for the hills, debt was         from unfavourable movements in
nowhere to be seen, cash flow was       the market. “A company we work
dreadful and there were no signs of a   with exports to the US and receives
recovery. Our competitors had their     payment for its products in US
heads in their hands, not knowing if    dollars, which then needs to be
survival was possible. We should        converted into sterling,” says Robin
have gone on an acquisition spree       McEwen, managing director at
while the economy was at its worst      Foremost Currency Group. “It fixed at
and the prospects were dreadful,        a rate of 1.46 using a forward contract,
picking up those competitors that       achieving £171,232.87 for $250,000.
were doubting their future.” Now,       The market peaked at 1.7 just four
with light at the end of the tunnel,    months later. If they had not ‘forward
prices are creeping up – but there      sold’, they could have been faced with
are still bargains out there.           recouping only £147,058.82.”

                                                  REAL BUSINESS ocToBer 2009 47
3 Reinvest your money                     eponymous high-street cobblers,            assets on your insurance policy are
into the business                         has the answer to painless cost            overstated, you no longer own some
Personal income tax rates have risen      cutting. “Your finance department          assets that you’re still insuring, and
to more than 50 per cent, so you          will almost certainly have paid the        you could dispose of some of the
should have considered sheltering         same bill twice during the past year       equipment and remove it from cover.
your money inside your company.           – the challenge is to find that double
“It’s far wiser to reinvest profits,      payment,” he says. “Clear a day in         9 Pay up on time
rather than extract them as salaries      your diary to go through every             Last year was tough for building
or dividends,” explains Nick Braun        invoice and check every payment            contractor Alumet. Founder and
of Taxcafe. “If your profits are taxed    for the past 12 months. I guarantee        MD Gary Summers (see page 18) was
at 21 or 22 per cent, you’ll have a lot   you’ll find fiddled expenses, costs        forced to make 20 redundancies, take
more cash left over to grow the           you thought you had cut out years          the factory down to a four-day week
business than someone who pays            ago and several bills that really raise    and slash margins on projects across
tax at more than 40 or 50 per cent!”      your eyebrows. As you sift through         the board. But there was a silver
                                          the records you’ll learn a lot about       lining: the cash-rich firm claimed a
4 Reassess the competition                the business you thought you knew          wedge of revenue back for settling
International firms have gone             in detail – and you’ll almost certainly    invoices on time. Discounts range
under, while start-ups have               find at least one double payment.”         between two and five per cent per
observed explosive growth. Did
you reassess your competition
and adapt? “In the late eighties, my
                                            Interest rates are on the rise.
recruitment company, Alexander            You shouldn’t pay Mr Darling one
                                          penny more than you have to
Mann, struggled through a sizable
economic hiccup,” says Dragons’
Den star and multi-millionaire
investor James Caan. “The industry’s      7 Reduce your debt                         invoice. “I think we saved more than
big firms were relying on the same        If you knew then what you know now,        £80,000 last year for paying early,”
old networking skills, while new          you would have reduced your debt in        says Summers. “We pay people early
companies, who offered a cheap            early 2007 when borrowing was both         now for the pleasure of getting a
alternative, were poaching cash-          cheap and plentiful. If your business      discount back!”
strapped clients. So I downsized          has no debt overhang, consider the
and did the same.”                        counterintuitive strategy and prepare      10 ... and be honest
                                          yourself to take on debt during the        when you can’t
5 Ask staff to work for free              next 18 months. “Banks need to lend        If you struggled to pay your suppliers
When British Airways announced            and would prefer to do so to               on time, the worst thing you could
a record annual loss of £400m in          businesses that don’t need to borrow,”     have done is patronise them with
May, chief executive Willie Walsh         explains turnaround specialist             excuses or, worse still, panic and
declared there were “absolutely           Anthony Holmes. “Interest rates will       ignore them. “If you’d built up good
no signs of recovery” in the industry     undoubtedly increase during the next       relationships with suppliers, they’d
and asked his 40,000 staff to             three years, so try to fix the rates for   have understood if you needed an
volunteer to work for free, take          the period of the investment and make      extra five days or so,” says Kim Farrell,
unpaid leave or work part-time in         sure that the borrowing is explicitly      corporate finance manager at CBHC
what he called a “fight for survival”.    under the terms of the Enterprise Act      chartered accountants. “Losing their
More than one in six staff agreed.        and not subject to any arrangements        goodwill may damage your credit
Their actions will save the company       you had with the bank prior to 2002.”      rating, shutting off invaluable access
up to £10m.                                                                          to funds with potential investors,
                                          8 Review your insurance                    banks and customers.”
6 Nitpick invoices                        Have you checked whether your
John Timpson, Real Business               insurance policy is still good value for   11 Claim every tax deduction
columnist and chief executive of the      money? Chances are the value of            “Taxes are on the rise. You shouldn’t

                                                                                                REAL BUSINESS ocToBer 2009 49
  In a recession, you should have
revisited your budgets every few months
pay Mr Darling one penny more             employees share options under the        didn’t fix them because you didn’t
than you have to,” says Taxcafe’s         Enterprise Management Incentives         have the time, there were more
Braun. If you did any work from           (EMI) scheme. “These can be worth        important things to do, you didn’t
home, for example, you should have        up to £120,000 per employee and          have the heart, you didn’t have the
claimed part of your home’s running       offer a valuable incentive with zero     courage, or you simply couldn’t be
costs: mortgage interest, council tax,    impact on cash flow,” comments Eric      bothered,” says John Timpson. “You
gas and electricity, etc. “Few            Pritchard, director of Hatfield-based    now have no excuse. Sacred cows
accountants understand the home           chartered accountancy firm Keelings.     have to go. This should have been
office deduction. They don’t claim                                                 the perfect opportunity to stamp
it for their clients or they don’t make   15 Call HMRC’s Business                  out irrelevance and nonsense in the
a big enough claim,” continues            Payment Support Line                     name of common sense.”
Braun. “If you used one of your cars      If you were worried about being
for business during the past year –       able to meet tax, National Insurance,    19 Obsess over your budget
even just a tiny bit – you should have    PAYE or VAT payments, Pritchard of       Most companies prepare budgets
claimed part of your running costs.”      Keelings says you should have got on     annually, make occasional reference
                                          the blower to HM Revenue & Customs’      to them during the ensuing year, and
12 Take a holiday                         Business Payment Support Line – set      that’s about it. In a recession you
“In many firms, the recession has         up in November last year – to discuss    should have revisited your budgets
been marked by long meetings              temporary instalment payments. But       every few months. Then you should
and long faces. If your company           it’s not too late. Call 0845 302 1435.   have showed the other directors
is shrouded in gloom, my                                                           what margins you made on the poor-
recommendation is to go on holiday,”      16 Check your stocks                     performing lines, recommended that
advises Timpson. “You probably            “Entrepreneurs should have looked        they be dropped, and updated the
think that you are indispensable and      carefully at their stocks,” says Ray     sales-order pipeline. “Always look
that you should be there at the helm.     Doughty of FD Solutions. “They should    to see whether the trend in recent
Your colleagues probably don’t            have sold off obsolete or slow-moving    performance is accurately reflected
agree. Give them a break from your        stock and quickly turned those items     in projections,” recommends David
consistent anxiety and let them have      into cash.” Doughty recommends           Dawson of FD Solutions.
the freedom to find a few solutions       changing from a like-for-like stock
on their own while you are away.”         replenishment policy to buying one       20 Trim the deadwood
                                          new item to replace every three sold     In a recession, you can’t carry
13 Find a niche                                                                    any passengers. “Make sure that
This recession has seen generalist        17 Claim capital allowances              absolutely everyone is contributing,”
companies succumb to the                  Assets are cheap in a recession –        cautions FreshMinds Research’s MD
recession’s force – Woolworths            and you should have claimed capital      Alistair Leathwood. And be ruthless.
being the unfortunate, but obvious,       allowances on all of them. “If you       David Evans, founder of performance
example. “Pick a smaller niche            bought a new commercial property,        improvement firm Grassroots, says
sector and live out the recession         for example, then an immediate tax       he’s survived two recessions by
there,” advises Dragons’ Den star         deduction of up to £50,000 could         getting rid of “the more expensive
James Caan.                               have been claimed for integral           people in the company” and keeping
                                          features,” notes Braun of Taxcafe.       the “people on the ground” – those
14 Offer staff share options                                                       that make money.
If the recession drained your cash        18 Kill the sacred cows
and forced you to freeze pay, you         “For years you’ve put up with things     21 Carry back losses
ought to have considered issuing          that you knew were wrong but you         “Did you know that you could have

                                                                                             REAL BUSINESS ocToBer 2009 51
carried back losses of up to £50,000
and offset them against the profits          You could                             have reviewed the small print,
                                                                                   checked your covenant obligations
of the previous three years?” asks
Pritchard of Keelings. The carry-
                                          have carried                             and made sure you’re complying
                                                                                   with them. Richard Brooks of FD
back loss scheme will be available        back losses of                           Solutions advises entrepreneurs to

                                          up to £50,000
until November 2010, so get on the                                                 lodge management accounts with
phone to your accountant.                                                          their banks several days before

22 Increase your marketing                and offset them                          they’re due each month. “Accounts
                                                                                   submitted late result in increased
Recessions are the time either to
increase marketing or at least hold
                                          against profits of                       interest margins and higher
                                                                                   charges,” he says.
it steady. Can’t afford your normal       previous years
advertising budget? Then be creative                                               26 Cut your energy bill
in using the web, phone campaigns         depend on certain key suppliers, you     Warning: your energy contracts may
or other promotional routes like Simon    should have checked their credit         have been automatically renewed
Corbett, founder and MD of Jargon         ratings with organisations like Dunn     by your suppliers – at higher rates
Public Relations. With four staff and     and Bradstreet or your local             – without your consent. Knowing
an estimated second year fee income       chamber of commerce (which may           what date your renewal window
of £250,000 in July 2009, business        have negotiated special rates for this   opens could mean the difference
was going well. But then the recession    information). “Payment in 28 days        between paying 8p and 16p per
really hit home and business growth       means the funds should be cleared        unit for electricity. Check out www.
slowed. So he ran a competition with a    in your account by day 28, not a         makeitcheaper.com/how-to-switch.
business publication, The Home Based      cheque in the post with another          aspx to find out more.
Business Network, offering £1,000         five days to process and salaries to
worth of PR consultancy as the            pay in the meantime,” adds Farrell       27 Plan for the next recession
prize. “The competition was free to set   of CBHC.                                 Author of Managing Through
up and I wanted names and numbers.                                                 Turbulent Times, Anthony Holmes,
‘Normal’ advertising wouldn’t have        24 Be paranoid about cash                says entrepreneurs ought to have
given me that,” he explains. More         Seldom has the phrase “neither           kept a “recession diary”. This should
than 300 businesses entered, 180          a borrower nor a lender be” been         include: the five things you wish you
of which agreed to be contacted by        more appropriate in business. “If you    had done prior to this recession that
Jargon Public Relations. “The new         lose control of the cash, you can lose   would have made life easier, the five
business pipeline is bursting and         control of the company,” comments        things you’ve learned to do while
several meetings have already been        John Timpson. “I have our bank           managing your business in a
arranged,” he says.                       balance emailed to my BlackBerry         recession, and the five things you’ve
                                          every work day, always comparing         leaned not to do when managing
23 Chase up the debtors                   that figure with the balance on the      your business in a recession. “Put
“During the recession, you should         same day last year. When it comes to     those notes in an envelope marked
have identified slow-payers for               forecasts, I’m far more interested   ‘Notes to the future’ and log a diary
personal attention,                                 in cash than profit.”          reminder to read them on 1st
reviewed credit control                                                            January 2015 and every 1st January
procedures and set                                       25 Scrutinise             thereafter,” says Holmes. “This
weekly cash-                                              bank charges             simple procedure will preserve your
collection targets,”                                      Bank loan                current learning, ensuring it doesn’t
advises Doughty of                                        and overdraft            decay over the intervening years of
FD Solutions. If you                                      documentation            comparative stability and, hopefully,
rely on one or just                                       usually gets filed       renewed prosperity. Just think of the
a few customers                                          away and forgotten        benefit you would have derived from
for the bulk of                                        about. During the           reading similar notes from people in
your revenue, or                                     recession, you should         your position in the last recession.”

                                                                                             REAL BUSINESS ocToBer 2009 53

				
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