29 July 2009
Neil Relph, Location Director at the Beaconsfield office of Vantis, the accounting, tax and business recovery and advisory group, looks at some key lessons that can be learnt in a recession, and offers advice on how business owners can steer their companies to grow and prosper, by taking the right steps.
Hopes were high at the start of 2008 that the effects of the credit crunch would be contained within the global financial system; in fact for the first six months, we wondered what all the fuss was about. People assumed that non-financial businesses would simply carry on regardless – beliefs fuelled by the news of expanding sales and record profits.
The shock turn of events in September, when the credit crunch truly set in, changed everybody’s outlook almost overnight. It was as if suddenly businesses had fallen off an invisible cliff! The speed of the ensuing downturn caught everyone by surprise and now, six months later, nobody is expecting business as usual for the year ahead.
For many businesses, the top priority will simply be survival, while for others, a tougher economic environment will provide unexpected opportunities.
In uncertain times, cash is king, and those (mostly mature) companies that have strong balance sheets, healthy margins and good cash flow, will have a definite edge over those in the critical phase of their investment cycle – especially start-ups that are mainly spending, rather than producing, cash.
Many companies will cut discretionary spending and scale back growth plans to conserve cash until they get a clearer sense of the economic outlook. Among those that are not generating much cash, some businesses will fare better than others. For example, companies that took advantage of the loose credit markets before their abrupt freeze in the summer of 2007 will benefit from the favourable terms on which they managed to lock in credit lines.
An opportunity will arise for companies with cash to acquire weaker rivals and, through the synergy savings of a combined business, to increase profit margins, thereby repaying the initial costs of the acquisition.
In my opinion, few companies understand their existing business model – and many may not even have one. The premise behind the business’ development – its natural inter-dependencies, its strengths and limitations – is not clear, and therefore often not fully understood by management.
That being so, management may not be able to see when or how to leverage their core business to the greatest effect – nor know when the business’ success might create demand for a new business model. After reviewing these issues with business leaders, we have often found that the suggestion of creating a new business model is unpopular, as it is unattractive to internal and external stakeholders, partly due to the initial setup costs that may be involved. However, it is essential that managers see past the short-term barriers of their current situation and take a longer term view, in order to maximize benefit from the opportunities that lie ahead.
To do this effectively, thereby sustaining your business in a recession, I would advise you to reinvent your business model and develop a clear road map. We recommend three simple steps:
- Success starts by defining the business opportunity: to satisfy the needs of a real customer, who needs a job to be done.
- Construct a plan setting out how your business will fulfil the above need, at a profit.
- Compare your new plan to your existing model, and review the extent to which you would need to change it, in order to capture the opportunity.
By completing the above steps, you will identify whether you can use your existing business model and structure to meet the new need, or whether you need to separate out a new business unit, to execute a new model. Successful companies are those that profitably fulfil a real customer need with an effective business model, whether that model is documented or explicitly understood or not.
Of course, there are many more factors to consider when steering your business through a recession, and the above represents merely an introduction to these.
For further information, please contact Neil Relph by phoning 01494 675 321 or by using the form below.