In a recent interview with The Sunday Times, Tony Danker – director general of the Confederation of British Industry (CBI) – said he believes Britain faces a “deep recession” if the government “doesn’t get an urgent grip on the economy”.
But how might another recession impact businesses – and what can they do to manage their finances through such a turbulent time?
Andy Copsey, non-executive director at ABL and former COO at Handelsbanken UK, shares his thoughts and advice.
How might a recession impact SMEs?
In previous recessions that I’ve experienced, consumers have often tightened their spending. This inevitably meant that businesses in the supply chain were adversely affected by reduced income.
Combined with increased fuel and wage costs and the inefficiencies resulting from disruptions to supply chains and sometimes sub-optimal home working – this ‘double whammy’ for businesses will mean lower profit levels and, all things being equal, a deterioration in cash flow. And we all know that “cash is king” in an SME.
In turn, this can result in businesses reducing their level of investment and being more cautious about borrowing – while lenders could become more risk-averse if they are nervous about loan defaults.
Even if the risk appetite of the lender community stayed the same, it’s likely that an SME’s credit rating will reduce if their profitability falls – meaning some will be rejected by lenders that had historically supported them.
How else could a recession impact lenders’ behaviour?
Lenders are more likely to require extra security such as personal guarantees to cover the perceived increase in risk, and / or reduce the amount made available. Also, businesses that have historically enjoyed good relationship with their lender may see service levels deteriorate as the lender focuses on their struggling customers.
In extreme circumstances lenders with excessive defaults may even cease new lending.
What are your top tips to help businesses manage their finances in a recession?
Preparation is key. Businesses should review their credit control procedures to protect themselves from bad debts and manage cash flow carefully – including regular credit checks on customers - and even consider insurance.
Where applicable, carefully manage stock levels to ensure cash isn’t tied up that might be needed elsewhere. And ensure long-term contractual commitments have break clauses in case you need to scale back costs.
Establish relationships with good professional advisers in the areas of finance, law, property, accountancy etc. They will help you prepare for, and survive, through turbulent times.
For example, a good commercial finance consultancy will understand that borrowing money (rather than using your own cash) helps to preserve cash. Cash is king remember – especially in challenging times.
What’s more, if your usual lenders become more cautious, the relationships that commercial finance consultancies enjoy with a wide range of lenders will become even more important – as they act as the vital intermediary between the business and lender to ensure finance is secured even in challenging times.
Are there any positive outcomes for SMEs in a recession?
Of course - businesses that are prepared will be better placed to take the opportunities that arise when their less well-managed competitors are struggling. And that includes acquisitions for growth – with the help of a good commercial finance consultancy
If you want to find out further information about this topic you can get in touch with Alex via email or call her on 07903 769037 to talk through your options.