Many small businesses are right now focused on surviving the economic downturn, but what are the key considerations in taking advantage of an upturn when it comes? It is, perhaps, surprising to learn that having battled through the downturn, those same businesses can then struggle, and sometimes fail, as the economy picks up and the order book starts to fill.

SWIG Finance’s Portfolio Manager, Mike Wall, takes a look at the pitfalls:

Mike Wall

The phenomenon whereby a business can struggle during a period of healthy economic activity, having survived a recession, may not be as surprising as perhaps it first appears.

During the downturn, hatches will have been battened down – cash reserves may have been eaten into; loans or overdrafts perhaps taken out to help trade through the bad times; even a skilled workforce may have been slimmed down; and creditors may have been stretched to help cashflow.

All this could mean that sales become more buoyant at a time when the business has been weakened and is less able to take advantage.  Worse still, its working capital cycle may be such that over-trading may pose an existential threat just as the sales opportunities rev up: if the cash merry-go-round isn’t generating enough money at the right time to cover rising bills as they fall due.

As is often the case, effective planning can identify potential problems, which then points you towards the decisions needed for you to manage the business instead of the business managing you.

Imagine this scenario: your business has been trading at subsistence level for several months due to COVID-19 restrictions. As these restrictions lift, a large order comes in – this should be a cause for celebration, but there are crucial things to consider.

Cost and profit: it’s great to have the option of this order, but have you been dazzled by the top line?  What are the fixed and variable costs; are there penalties built in in case of late delivery or quality issues; what is the identifiable benefit(s) that this order should produce?
Impact on Physical Resource:
do you still have the resources to fulfil that order, and what happens after it has been fulfilled? Strategically review your resources, pre and post order: human; materials; technical; and equipment.
What about the cash cycle – the lifeblood of the business? Make an informed cash forecast, use it as a tool and think about things like:

  • How much money will be tied up in things like stocking up; work in progress; debtors/creditors?
  • Itemise and map forward the timings of all the costs you will incur before getting paid yourself: overhead; wages; HMRC; materials purchases; sub-contractors; business as usual etc. etc.
  • Run the forecast forward another 6 to 12 months – will other costs be kicking in that you need to think about now (the commencement of CBILS repayments, for example)?
  • How certain are you’ll be paid (and when will that actually be)? A customer is only good if you’re paid, so try and agree as favourable a set of terms as is reasonably possible, including perhaps stage payments. Also, credit check where appropriate, and see if you can find out if the customer has a history of late payments.  Test your forecast to look at the impact, for example, of a late payment or a penalty clause
  • Bearing in mind the above, do you need access to finance to fulfill this order with a margin to spare? If so, start to make arrangements now – lenders will find it far easier to back a well-planned proposal than an exercise in fire fighting

If your business has made it this far, please don’t let the upturn leave it on the wrong side of a Waterloo!

SWIG Finance provides business loans for SMEs in the South West. If your business needs additional working capital for growth or to overcome short-term challenges, our business managers will welcome an informal discussion with you. We can help you determine if a loan is a viable option for your business.