Running a business in tough times

In the present economic environment all businesses are looking long and hard at market and business operations and considering how they are going to maintain, let alone increase, turnover and profitability. While even in a recession there are positive stories, businesses are increasingly making pragmatic and conservative decisions in order to protect their existing position. Some of the things we are seeing include:

Reviewing HR policies and incentives

While the reality is that there will almost certainly be increased numbers of redundancies, some clients are being much more proactive in their management of their workforce. That includes hiring freezes, reallocation of employees, increased training programmes to improve efficiency and client service, and the re-examination of incentive schemes. Many employee share option plans are now 'underwater' and we are increasingly working with clients to either replace existing option schemes or (given that the prospect of an exit has for many greatly reduced) implementing alternative incentive or bonus arrangements, often more heavily weighted to personal performance. Keeping staff motivated and delivering high quality customer service is becoming ever more important, as is retaining the key staff which the business relies upon.

Debt collection

All businesses are noticing increases in debtor days. As cash gets tighter it is unsurprising that debtors seek to hold on to their cash for as long as possible. Clients are having to get much more aggressive with cash collection. That often requires amendment to existing terms and conditions (eg. reducing payment dates from, say, 28 to 14 days, incorporating benefits for prompt payment, tightening up default procedures) and being tougher in chasing non-paying customers. While clients might have been more forgiving with non-payers in a buoyant economy, we are increasingly being instructed to chase bad debts on behalf of clients at the earliest opportunity. While that can be an unpleasant task, establishing a reputation amongst customers and clients for requiring prompt payment can bring long-term benefits. The reality is that many businesses make decisions as to who to pay first based on who is shouting the loudest.

Prudent cost-cutting

Just about every business is currently looking at ways in which it can cut costs without affecting turnover and service quality. One area where we are helping clients who are looking at reducing costs is in relation to lease obligations. There are increases in clients looking to sub-let or assign burdensome leases, buy their way out of lease obligations (which while involving a greater upfront cost, can greatly reduce medium to long term exposure), or in the extreme, looking at voluntarily going into administration (with a pre-packaged buyout vehicle in place) to rid themselves of crippling fixed costs.

Financial controls

In growing businesses, particularly at an early stage, it is not uncommon for financial controls to sometimes be somewhat lax. While business is booming, problems might not be so apparent, however the buck stops with management. They need to be fully aware of what is going on within the business, especially if there is any suggestion of the business potentially trading beyond its means. We are increasingly advising clients about issues relating to wrongful trading and directors' liabilities. That in turn is reflected in management becoming much more aware of the importance of financial controls including CEOs wanting to approve each and every expense, sign every cheque, and generally seeking to ensure that each expense generates a positive return on the investment made.

Communicating with investors and funders

The key is to keep talking to them, whether business is good or bad. Everyone recognises we are entering difficult economic times. That includes the banks, VCs and business angels themselves. In such difficult times keeping the lines of communication open, particularly when the news is bad, is vital. No investors or funders like unwelcome surprises. With time, and with full and frank discussion, funding solutions may often be able to be found, or alternative business strategies adopted. That can involve additional capital injections, the seeking of alternative funders, a trade sale (albeit sooner than perhaps expected or hoped), the hiving off of parts of the business, or at worst an orderly winding-up process. On the other hand, bad news delivered just before the money runs out almost certainly guarantees disaster.