Business Matters – Issue 26

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Levelling up in a downturn

Life doesn’t stand still for long – especially if you’re a business owner. And many keen entrepreneurs will have been biding their time during the pandemic, waiting for the moment to launch a new growth strategy. But with runaway inflation, rising interest rates, a competitive jobs market and Brexit restrictions to contend with, it’s easy to feel discouraged.

But amid the volatility, there are still ample opportunities for growth. It’s not just about navigating the ‘downs’, but seizing the opportunities presented by the ‘ups’ too.

Here’s how your business can reach new heights down the downturn.

Staying agile

While we’re not officially in recession, it’s a close-run thing. The Bank of England forecast the downturn could last into the first half of 2024,1 while an October 2022 survey revealed 83% of small firms were affected by inflation – up from 59% in 2021.2

But the outlook for SMEs isn’t all gloomy. Agile companies are well placed to capitalise on new opportunities that may appear at this time.

Some entrepreneurs even relish the challenge presented by tougher economic times, as they need to compete harder – and smarter. They can grow or expand into new markets, drive more robust marketing strategies or exploit gaps created by failing competitors.


Beyond the bottom line

It’s also about strengthening what you have. In modern business, it’s no longer about growth at all costs – it’s about efficient, good-quality growth.

Although profitability is undoubtedly a measure of success, companies must improve the elements that make up corporate ‘quality’ and long-term sustainability. A quality business has healthy levels of cash flow, agility, innovation and intellectual property. It also safeguards cash flow through strong credit and cost-control processes and protects intellectual property through patents, for example, and fosters staff retention by encouraging employees to grow their knowledge and skills.

It’s important to look after your team and protect key employees with health cover, key-person protection and shareholder protection. We’ve also recently talked about employee financial health checks.At Wellesley, we can provide your employees with one-to-one personal finance advice, which will give them confidence and help them feel in control of their money. If you’re interested in organising quarterly financial health checks for your employees with a Wellesley adviser, contact us today!

Quality is also about building long-term value in a structured way through better systems and processes, and mixing revenue streams to avoid over-reliance on one type of customer or product. And, as well as adding value for your customer, it’s about evidencing this to reinforce your quality, i.e. shouting about your success stories.

And don’t forget environmental, social and governance (ESG) factors. For example, are you working towards carbon neutrality and reducing waste? Are you improving your social impact through community and charity projects? Does your business have strong governance processes?

Identifying growth opportunities

If you’re happy with your corporate quality, seeking new growth areas might be next on your agenda. And the outlook isn’t as gloomy as it first appears. While overall the UK economy contracted by 0.2% in Q3 2022, output increased in 10 of the 20 sectors tracked by the Office for National Statistics (ONS).3

Indeed, downturns are often when new niches or markets can appear. Don’t forget: some of the most successful businesses of recent years launched during periods of adversity. That includes big companies such as WhatsApp and Uber, all of which were founded in the aftermath of the 2008 financial crash. Plus, the pandemic saw new markets pop up in safety equipment, medicine and working-from-home technology. And it’s not just finding new niches or revenue streams. British start-up owners are more enthusiastic than ever, with 753,168 company incorporations from 2021 to 2022 ­– the second-highest on record.4

Before pursuing new markets, it’s essential to have good cost controls to protect your cash flow, margins and working capital.

Cash flow is king

That said, cash flow isn’t just an issue when seeking growth, it’s also important when trying to keep an even keel.

With the challenging economic outlook, small and medium-sized enterprises (SMEs) face increasing pressures on their cash flow – 40% of businesses have less than three months’ cash reserves.5 Chief causes of cash-flow squeezes are late payments from customers, rising costs, seasonal slowdowns and, of course, inflation. But there’s much you can do to keep the pounds flowing.

5 tips for improving cash flow

1.Tighten up your collection processes

Make sure you invoice promptly, set payment terms for customers and get payments upfront where possible. Use accounting software to track payments and send automatic reminders.

  1. Build reserves

Building a cash buffer is one of the simplest ways to protect your cash flow. What’s more, a robust three-year business plan is also crucial in helping you keep your cash flow on track and mitigate any risk.

  1. Avoid using personal money

Putting family money into a business is risky. Worryingly, a third (34%) of SME owners said in October 2022 that they had used personal funds to finance their business in the previous 12 months.6

  1. Explore funding methods

Think about negotiating extended credit terms with suppliers or spreading the load by asking to pay big bills in monthly instalments. Another option is invoice finance, which enables you to use unpaid invoices as security for a loan.

  1. Create a cash-flow forecast

Plan with more prudence and safety in mind when expanding in a downturn. Several forecasting solutions are available that allow you to automate your cash-flow analysis, as well as integrate with cloud-based accounting systems.

Time for a reshuffle?

Many business owners will experience the feeling of hitting a glass ceiling when it comes to growth. If your business is thriving through the downturn, the time may come when you need to review the expertise of your management team and bring in fresh talent to ensure you prosper with the right people.

Reconfiguring and adding to the team at the right time is essential. For example, you may start with a bookkeeper in your finance department, then evolve to needing a Financial Controller, a Finance Director and, finally, a Chief Financial Officer.

This can lead to tricky decisions and uncomfortable conversations with staff, so you should plan and manage such transitions carefully. Map what a good management team looks like for each growth stage, and get a sense of the gaps in skills, experience and behaviour, which you can address through development and recruitment. How could the existing team benefit from the new hire’s knowledge and experience?

One of the toughest decisions may be around your own role in a growing business. Your personal situation will play into this decision. For example, will changing your role allow you to semi-retire or retire when you want to? Could you afford to downsize your role to pursue other goals, such as starting another business or social project? Again, this is where advice can be invaluable.

Stick or draw?

So, you’ve successfully navigated a restructure and business is booming. Now what? If you’ve come into some extra profit unexpectedly, it can have a significant impact on your business and personal finances – when used wisely.

Just as a pay rise or an inheritance make a difference to your personal finances, an unexpected business windfall presents lots of exciting financial-planning opportunities. It could go a long way towards helping you achieve your long-term goals.

You might be wondering whether to use the boost to consolidate the business’s position, or you may want to cash in on your success by extracting some profits. If the latter, it’s important to carefully judge how much to take and what the tax implications might be. How much you decide to withdraw depends on your plans for the future – both personal and for the business – and how much risk you’re willing to take. It’s possible to take too much cash from your business, leaving it vulnerable to unexpected events, such as a sharp economic downturn or the departure of a long-term client.

Typically, an entrepreneur will mix three main options to increase what they earn from their company, ensuring they make the most of the tax exemptions available. These are:

  • Take more salary
  • Pay extra pension contributions
  • Pay a dividend.

The right option for you will depend on a whole host of factors, which is why good advice can be invaluable.

Levelling up in a downturn

An economic downturn isn’t always bad for business. Ultimately, your firm’s quality factors can help you remain relevant long term and attractive to potential investors or buyers – as well as offer your business an opportunity to expand and thrive.

By planning ahead and taking regular advice, you can not only adapt to changing circumstances and pivot swiftly where necessary, but also capitalise on opportunities presented by the downturn.

Speaking to us will help you gain clarity and make confident financial choices, so you can be confident that you’re doing what’s best for you, your business and your employees.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

SJP Approved 05/05/23


1 Monetary Policy Report – November 2022, Bank of England, November 2022
2 Top 10 Impacts of Inflation on Small Businesses, Iwoca, October 2022
3 GDP First Quarterly Estimate, UK: July to September 2022, Office for National Statistics, November 2022
4 Companies Register Activities, 2021 to 2022, Companies House, June 2022
5 Business Insights and Impact on the UK Economy: 13 January 2022, Office for National Statistics, January 2022
6 SME Finance Monitor, BVA BDRC, October 2022