Survival guide for small businesses

Running a small business is never easy but, in the current economic climate, it’s even more of a challenge. Rising costs, dwindling customer numbers and the reluctance of banks to lend money make it increasingly difficult.

More than 22,000 firms went bust during 2008 – and small businesses are now disappearing at a rate of 123 every working day, according to a report by accountants BDO Stoy Hayward. This means that more than 30,000 will have gone under by next Christmas.

So how can you improve your chances of keeping afloat? Here is our small business survival guide to help you through the recession.

Face facts

The first step is to face the situation. Don’t bury your head in the sand and hope things will improve – you have to make things happen yourself.

According to Andrew Burn, a director of restructuring at KPMG, businesses generally fall into four categories, depending on their cash flow, debt levels and prospects: stable; at risk; stressed; and distressed.

“This is the spectrum between being solvent and insolvent,” he explains. “People need to know where they sit before deciding what needs to be done with their business and the order in which issues need to be tackled.”

The best way to find out where you are on the spectrum is by putting together a 13-week forecast of expected outgoings and receipts. Not only will this give you a real insight into how the business is performing, it will also identify any longer-term problems.

“If this highlights problems then it’s likely you’re sitting at the back-end of stressed and at the beginning of distressed,” says Burn. “You can usually get out of being stressed, but if you’re distressed you’re up against the clock and constantly fire-fighting.”

Once you know what you’re up against, it’s time to take action.

Keep the cash flowing

Cash flow is the lifeblood of your business so this must be top priority. Are you forced to dip into your overdraft every month because your customers’ bills are outstanding? Remember to send your invoices out on time and consider phoning your customers before the end of the agreed credit term to confirm they’re going to make the payment.

The Late Payment of Commercial Debts (Interest) Act 1998 allows small companies to get tough by charging interest on money that’s outstanding from larger companies. This can be a complicated area, however, so seek advice from your local Business Link before making a claim.

Norman Whyte, chief executive of the York Business Advice Centre, also warns against buying more stock than you need as this is a drain on resources. “Concentrate on products and services that sell, and don’t be tempted to slash prices without good reason,” he adds.

Make a contingency plan

Burn says that, regardless of whether your business is performing well or barely keeping out of the bailiffs’ reach, it makes sense to put together a contingency plan to help safeguard its future.

“These disaster/recovery plans used to focus primarily on what you would do if the office burned down, but now they include potential financial problems, such as what happens if your bank goes bust or your principal customers go elsewhere,” he says.

The ideal scenario is to keep your options open. If your main supplier goes bust, for example, you need to know you can immediately swing over to a rival company and allow your business to continue uninterrupted.

The same applies to customers. Do you receive a large percentage of your takings from one client? Or do you have a number of income sources, which means you won’t go under if one or two customers collapse over the coming months?

You also need to carefully monitor these clients. The first sign of trouble in a business is usually when it stops paying its bills on time. If one of your customers does this, then be wary of allowing them any more credit in case of default.

While your contingency plan will have identified areas where significant reductions are possible, such as through the application of redundancies, plenty of other cost-saving measures can be implemented throughout the organisation as a matter of course.

Watch the pennies

Look carefully at your expenditure. Every company pays out for something that’s a waste of money. This might not matter so much in buoyant periods, but every penny counts when times are tough.

For example, making employees travel second class rather than first, keeping in contact with customers by phone instead of in person, and shopping around for the best energy or stationery deals are all ways in which you can reduce expenditure.

It might even come down to removing the coffee machines, adds Stephen Alambritis, chief spokesperson for the Federation of Small Businesses. “It sounds cruel, but the priority is to ensure the business survives, so it’s preferable to making redundancies,” he says. “You could also try to reduce your insurance premiums, business rates and, perhaps, ask your landlord if you can pay monthly rather than quarterly in advance. All these measures will save money.”

Look after your clients

While the natural reaction to a downturn may be to search for new income streams, Norman Whyte points out that it’s important not to overlook your existing clients.

“You should focus on selling more to existing customers as this is cheaper than sourcing new ones,” he says. “It’s also important to provide outstanding customer service by giving them more than they expect to receive. An efficient service, fast delivery and flexible payment terms can put you ahead of the competition.”

It’s also worth revisiting suppliers to see if you can renegotiate more favourable terms. Everyone is expecting such phone calls at the moment, so you may find they are willing to discuss discounts to guarantee business is put their way.

When times are tough it can be tempting to cut back on your advertising and promotion budgets, but this could be a mistake. “You should actually increase your marketing and start shouting about your business,” Whyte insists. “You need to tell potential customers why they should be using you.”

Talk to your bank

Owners of stressed businesses need to be in regular contact with their bank and major suppliers, adds Alambritis. “They need to make sure the tax and VAT bills are paid and that the overdraft is at the correct level. If they’re not, then these institutions have the power to close your business down.”

However, there’s a fine line between worrying your bank by going to them with every little problem and keeping them abreast of what’s going on in the business, points out Andrew Burn.

“In the current environment, you don’t want to unnerve them, so show them you are proactive and have already identified solutions to problems,” he says. “They will be impressed that you’re taking action – the last thing they want is any nasty surprises.”

It’s also advisable not to ask for more money unless it’s totally unavoidable. Going cap in hand to your bank gives it the perfect opportunity to charge you fees and revisit your existing arrangements. So, instead, see if you can make better use of the working capital in your business.

If taking out a loan is unavoidable, then shop around for the best offers. Although banks are reticent to lend, they will still do so if you can put forward a strong argument as to how you will use the money.

Seize new opportunities

Of course, it might even be possible to cash in during the economic downturn, suggests Alambritis. “Nobody likes a recession, but having less trade gives you time to take a fresh look at your business. You can take stock because you’re not flat-out satisfying orders so have time to spot any new opportunities.”

These can include diversifying into totally unrelated ventures, looking into the possibility of exporting your products into new markets, or expanding the range of services being offered to existing customers.

“This might necessitate a change in your unique selling point, which can be anything from packaging to price,” he adds. “You’ll always get periods of boom and bust, so you need to readjust to the times and see if there are any new customers you can pick up.”

Essentially, there are three main options for growth: increasing your market share; diversifying into other areas and expanding through merger and acquisition activity, joint ventures or partnership arrangements.

Choosing which route is best for your business requires a thorough analysis of your business and how it is performing. Timing any expansion is also critical. You need to ask yourself a number of questions – for example, is the business already working at full capacity and would the systems in place enable it to continue trading during the expansion?

There are plenty of organisations willing to give you advice and support – so don’t be too proud to ask for help. The best starting point is your local Business Link, which is a tremendous source of information on everything from dealing with staff to accessing the package of financial measures announced by the government in last November’s Pre-Budget report.

Putting changes in place may be an unpleasant task, but making the right decisions now will help safeguard your firm’s future, insists Alambritis. “In the current market, you have the opportunity to change the cost base and culture of your organisation, which will help the business maximise its opportunities over the next couple of years or at least prevent it from going bust,” he says.

“When we come out of the recession your business will be in a much stronger position because it will be leaner and more able to take advantage of any opportunities that arise.”

What the government could do for you

The government unveiled a package of measures in last November’s Pre-Budget Report to help businesses during the current challenging economic environment.
It includes:

* Small Business Finance Scheme providing support of up to £1 billion of bank lending
* Separate £1 billion guarantee facility to support bank lending to small exporters
* £50 million fund to convert businesses’ debt into equity
* £25 million regional loan transition fund
* HM Revenue & Customs Business Payment Support Service to allow businesses in temporary financial difficulty to pay their tax bills according to an affordable timetable
* More generous tax relief for businesses making losses
* Tax reforms including the deferral of the increase in the rate at which small companies pay corporation tax
* Measures to enhance the access of SMEs to Government contracts

The worst-case scenario

What happens if you have cut your costs, explored every way of expanding your customer base, and persuaded all your customers to pay what they owe, yet your firm’s financial problems still appear insurmountable?

If this is the case, then it’s time to call in the experts. Not having enough assets to cover your debts – or pay them when they are due – means your business is effectively insolvent and it might be too late to salvage it.

In many cases, your accountant will be able to guide you, but you may need the specialist advice of an insolvency practitioner who will analyse your business and point you towards the most suitable outcome.

The first option will usually be to see whether an agreement can be reached with your creditors on either the amount owed or the time you have to pay. These voluntary arrangements can be set up for individuals (sole traders), partnerships or companies.

Your next step will depend on the structure of your business. Sole traders can end up going bankrupt, while the options for companies include administration (to try and rescue the business) and liquidation (when the assets are sold to pay creditors).

This is a complex area, adds Andrew Burn, director of restructuring at KPMG. “If you think your business may be insolvent, seek the help of an insolvency professional as there will be a variety of options open to you.”