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Recession ahead? - Prepare your business

There is ongoing economic uncertainty and the possibility of the UK entering a period of significant downturn or recession, which means businesses and the public will spend less money.

It is therefore important to plan if you haven’t already and get your business into the best position to weather what comes.  Wisdom shows that in a recession, businesses should look to ‘trim fat’ so that they leave themselves in a good position to grasp opportunities and recover quickly and profitably.  Here are some practical steps you can take now to prepare.

Business planning

Have a plan. It’s likely you have a business plan but how often do you refer to it and is it still relevant and up to date? Sitting down with your whole senior management team is important to discuss and agree where you want the business to be in the next 12 months, three years, five years etc and if you have the right people to take it on that journey.

You might want to consider other options such as bringing in someone with more senior management or financial experience to take over the day to day running of the business, stepping aside for the next generation to take over, or consider merging or selling
your business. 

Whichever route you choose, there will be a number of consequences and talking through them, mapping out the different decisions and outcomes and speaking to experts can help you to make the most informed decisions.

Employment

Review your employees – from recent new starters to those who have been with you for years. Decide who is the best placed with the right skills, knowledge, and experience to help your business meet its longer term objectives.  Which leads to:

Review redundancy policies and procedures in case there is a significant downturn in demand for your products or services and update if necessary.  You might also want to consider other alternatives before making any redundancies, for example there might be employees who want to retire early or those who want to work more flexible hours, perhaps part time hours with the view to this being reviewed again later when business picks up again.

Try to prioritise and maintain employee training and development budgets as you will need your team to be equipped with the right skills once any downturn ends. If you do decide to terminate any ongoing contracts early such as training contracts, make sure you understand if there are any financial penalties involved or if it can be deferred to a later date.

Think about areas of the business which might be outsourced such as your admin support, payroll, HR, IT support, marketing or PR and review the level of service and costs savings which could be achieved by doing this.

Cashflow

Cash is king and maintaining your cashflow is essential for long-term business success. It is also the responsibility of the directors of the business to follow their directors’ duties which are set out in  The Companies Act 2006.  With inflation at 9.4% the highest level for 40 years and interest rates slowly rising, your own costs will have risen and keep rising.

Think about your own pricing for any quotes or tenders and any existing contracts in place.  You need to ask yourself if it is cost effective for you to meet these obligations or how to word agreements which will allow you to factor in additional price rises. Review and update your terms and conditions of business to allow you to be more agile in response to price changes if needed.

If the UK enters a recession and your business has debts and significant overheads you need to act quickly. Is there the opportunity to restructure or renegotiate any debt? Review the terms of any lending agreements to see if more favourable terms can be agreed.

Improve your own credit control and chase debtors more effectively. Ensure that you have a proactive debt recovery policy in place to chase for payment within the agreed terms or ask for payments up front from clients and customers who persistently pay late or less than the agreed amount.

Familiarise yourself with the procedures which need to take place to enable you to use the courts to help you recover a debt, which will have associated costs, procedures, and a timeframe to follow.

Consider if it is possible to find new suppliers to help you maintain or improve profit margins.  When working with any new supplier make sure you have a robust contract in place and don’t skip on the due diligence process.

Be wary about reducing spend too much, too quickly in key areas. For example, during a recession, it is important to look after your loyal customers therefore many businesses focus budgets on marketing spend to maintain and build these relationships and maintain brand awareness. This can help them to achieve organic growth and to be in a position to realise higher growth once the economy begins to recover.

Diversification

Are you able to diversify any part of your business offering and if you can, think about the legal implications for doing this, such as ensuring you have relevant insurance and up to date terms and conditions in place. Remember how quickly many businesses managed to pivot at the start of the pandemic in March 2020 and ask are there any lessons that can be learned or trends you can act on now.  And it is worth noting that many of the world’s largest and most successful businesses have been set up during times of recession to capitalise on changing consumer needs and requirements.

If you rent a commercial property you will need to check the terms of your lease to ensure that you can diversify your business operations and if in doubt seek the written permission of your landlord.

Review your lease obligations

If your business leases any equipment, vehicles, or property these obligations continue even if the business fails, unless you have negotiated a termination clause. If you are considering ending a lease for vehicles or equipment early there may be clauses which oblige you to pay an early termination fee or penalty and you might be held personally liable if you have provided a director’s guarantee.  These can add up to a sizeable amount so it is important to understand all your obligations and the duration they last and factor them into business planning.

With a commercial property lease check the type of lease you have and if there is a break clause in your lease which allows either the landlord or the tenant to break the lease without any consequences. It is typical there would still be a notice period as there is when your lease comes to an end.

There are other ways to end your lease early if:

•     The landlord agrees.

•     The lease is assigned to someone else (although you may still need to provide a guarantee).

•     You are allowed to sublet (but you would still be responsible for the payment of the rent).

There could be other alternatives to ending your lease.  Your landlord might be willing to negotiate a rent free period, reduce rent or even consider changing to a profit based rent agreement.  Whatever you decide to do there are considerable consequences so it is important to get legal advice.

The journey of running a business is rarely smooth and having the right team behind you is essential to help you to reach your longer term goals and objectives. If you would like to discuss any aspect of owning and running a business, get in touch with our Business Hub team today.

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