If a recession strikes, and all the danger signs are present, firms must act now to ensure they are ready to respond to fast-changing market conditions. It is vital some of these steps are taken if firms want to be around to enjoy the recovery.
FOR MANY SMEs and owner-managed businesses, family involvement can lead to a lack of democracy or a business where ineffective family members hold down jobs which are not necessary or could be done better by others. Family involvement, if not carefully watched, can lead to an inflexible management team that is insufficiently skilled to effectively steer the company through difficult times.
Directors should ask themselves if the voices of younger, motivated managers are penetrating the ears of a self-opinionated and autocratic chairman? They should also consider if there is a strong finance person on the board, and will they stick to their guns during opposition from others?
THE SME'S market position, relative to its competitors, is crucial. Companies that may need to review their strategies before the going gets rough will have many attributes. They may have taken on a "big project" or an exceptionally large contract, for example, which, if it fails, has the potential to bring down the company.
Firms that have lost traditional export markets owing to high exchange rates may no longer be competitive in those markets when rates adjust downwards. Also, firms which have not adjusted to their European customers' requirements by, say, considering the use of the single European currency will be at a disadvantage. Sales-driven companies, where turnover is increasing, have to watch not just margins but the growth in their working capital requirement. When recession looms and sales volumes fall, banks seek compensating reductions in facilities.
FOR MOST SMES and owner- managed businesses, the management of cash as a scarce resource is probably the single most important issue in running a business. For all businesses, liquidity management must be competent, reliable and creative. Businesses that do not effectively address certain issues will be caught out. Assuming the management information system is effective, does management make proper use of it? Are cash implications deduced from the trading results explained to the "non-accountant" directors and are action plans developed?
Cashflow and budget forecasting is not a "once-a-year" activity. Companies should continually re-forecast and build in an analysis of the sensitivities of normal commercial hazards.
Also, can the company competently present its cash-management plan to its bankers when dealing with its facility renewal? Has the company really understood and addressed the issues most likely to be of concern to its lenders? If they get this wrong, it is an uphill task to re-establish confidence the second time around.
What's the solution?
SOME SMES and owner managed businesses fall in a recession because managers do not recognise or will not admit they need help from company outsiders. Egos are powerful and dangerous, yet the size of these businesses is such that many are unlikely to have the in-house skills and resources to do what is necessary to manage the change.
In developing strategic plans to face a potential recession, firms should look at reshaping their businesses. The markets for products and services will be carefully reviewed, as will the shape of direct labour costs and manufacturing processes. Action plans must be drawn up to implement any necessary changes.
Companies also should look hard at asset management, cash management, a cost-reduction programme and merger and acquisition opportunities.
The message we want to send is that professional advice now could help your business thrive while others go under. It's always better to call a doctor than an undertaker.
Tony Houghton, an experienced insolvency specialist, is head of insolvency at top-10 accountancy firm Kidsons Impey. The firm has launched a scheme - the Business Improvement Club - to help build small and medium-sized businesses by providing managers with a forum to exchange ideas on general business issues and to provide practical information to help with the day-to-day running of firms.Reuse content