Could the recovery be bad for your business?

Shoots of growthWith many experts and organisations much more optimistic about the UK economy following sure signs of the green shoots of recovery, how do you make sure your small business prospers – rather than falling victim to a sudden growth in sales?

There is an enduring claim (disputed by some – see box below) that more businesses fail as an economy or market recovers, mainly because of fatal cashflow difficulties brought on by a sudden and significant spike in sales. Businesses that accept cash or get payment up front may experience a boom, but for those that grant credit, a recovery can add extra strain to cashflow.

Carl Elsby“When a business experiences a marked sales uplift – whether linked to the wider economy or not – if not properly managed there’s a risk it could run out of cash,” warns chartered accountant Carl Elsby (right), founding partner of Northamptonshire-based chartered accountants Elsby & Co.

“A business owner or management team can get distracted by sales, so much so that they take their eye off their cashflow. So the business experiences a serious cash shortage while waiting for revenue to come in, which can prove fatal.

“When this happens, management nearly always react too late, often because of poor information or reliance on hope rather than taking decisive action.”

Cash is king

Elsby recommends maintaining detailed cashflow forecasts, broken down into weeks, updated when actual sales and costs become apparent. “You must factor in all costs associated with anticipated future sales, and sales forecasts must be realistic. Cashflow forecasts enable you to predict when cash will enter and leave your business, so you can identify whether problems are likely.

“A business should also try to have a cash safety net, especially with bank finance not being as widely available as it once was. You must expect the unexpected – even when your sales are increasing.”

And even if your sales are growing, Elsby says waste and inefficiency must not be allowed to add unnecessary cost. Businesses facing changing market conditions can benefit from revisiting their business plan, he adds, by setting new objectives and strategies

Staffing solutions

Sue Tumelty“As well as cash, businesses must ensure they have the necessary human resources to deal with a significant growth in sales,” says HR and recruitment expert Sue Tumelty (right), managing director of Bristol-headquartered consultancy, HR Dept.

“You have to find the right HR solution for your business. Not having enough staff could mean your customer service suffers, which will damage your sales. Maintaining good customer service is a key challenge during periods of growth.”

Tumelty recommends first trying to make your systems more efficient, using technology to free up people’s time where possible. Small-business owners are notoriously guilty of trying to combine many roles, she adds, when outsourcing could enable them to concentrate on sales and customers. “That could mean outsourcing your bookkeeping, IT, marketing, payroll or HR. Outsourcing can be more cost-effective, while often giving you access to someone else’s superior knowledge.”

Range of options

If you need to take on more staff, Tumelty recommends carefully assessing your likely needs and exploring all the options. “Employing temporary staff could provide a short-term answer, giving you time to find out whether sales will continue to grow, as well as plan a sound longer-term staffing solution.

“Alternatively, you might employ a part-timer, with the flexibility to increase their hours if necessary, or two part-time staff rather than one full-timer.”

Whether you bring in new people or give existing team members new responsibilities, Tumelty says proper training and supervision is essential. “Crucially, you mustn’t forget the contribution made by existing staff, especially if things have been tough for your business. They might not have had a pay rise for some time, and if the economy really does pick up they could take their talent, knowledge and experience elsewhere.

“Employees need to feel appreciated, supported and rewarded for their commitment – especially if they’re now faced with a more demanding workload brought about by more sales. If you want good employees to remain with you, they shouldn’t feel constantly overworked, underpaid and underappreciated,” she cautions.

Do more businesses fail during economic recoveries?

John Ashcroft“Conventional wisdom suggests that economic recovery brings with it an increase in business failures, as firms struggle to make sure they have enough working capital to finance growth, but this is simply not the case,” argues Dr John Ashcroft PhD, chief executive of pro.manchester and chief economist for the Greater Manchester Chamber of Commerce.

“The idea that as economies recover more businesses are forced into liquidation is a myth – as is the belief that UK business failures are lower in the current recession as a portend of more failures to come.”

Ashcroft has published a report called  Zombie Companies: Myth or Reality?, which was updated in August 2013. “We anticipate that the number of liquidations in 2013 will be 15,600, fewer than last year when there were more than 16,000. The level of liquidations will fall further in 2014 and 2015, as the economy recovers,” he predicts.

“Business failures are a coincident indicator – as the economy falters the rate of failure increases; as the economy recovers, the failure rate, in fact, slows. In the 1980 cycle, as the economy recovered, business insolvencies did increase, however, in the 1990 cycle they fell as the economy recovered. In the 2008 cycle, failures increased as the economy experienced serious problems, but in recent years, with the UK economic conditions showing signs of improvement, the insolvency rate hasn’t increased.

"As the economy recovers in 2013 and beyond, business failures will fall – not increase, as many analysts predict.”