How can SMEs prepare for an economic downturn?

The well-used adage ‘cash is king’ is particularly relevant for SMEs during an economic downturn. Late payments by their customers compromise cash flow at any time, but when the economy has also slumped, it can create a serious ripple effect throughout a business.

Without sufficient working capital to pay the bills they face the real prospect of insolvency if no pre-emptive steps are taken, and with warnings of a possible recession ahead, now is the time to act.

So how do SMEs maintain a healthy cash flow and prepare for an economic downturn in times of soaring costs, rising inflation, and supply chain challenges?

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CASH FLOW

Cutting costs

Cutting costs across the board, even by a small percentage, can make a considerable difference to cash availability. SMEs should closely scrutinise business expenditure, remove all unnecessary costs, and regularly seek out cheaper suppliers for essential outgoings.

Focusing on collecting debts

Reviewing debt collection procedures is a valuable exercise for SMEs to carry out at this time, and helps money flow into the business more efficiently. If not already in place, it’s worth considering offering early payment discounts, or reducing the time allowed between purchase and payment for customers on credit terms.

Renegotiating supplier contracts

Negotiating better credit terms with their own suppliers will also help to bolster cash reserves, and avoid potential cash shortages by allowing more days for the business to pay its bills.

STRATEGIES AND POLICIES

Scaling back

Streamlining operations to focus on core products or services provides a solid foundation during times of economic stress. SMEs may also be able to increase the number of income streams generated by their core offerings, so that if one line declines, it isn’t catastrophic for the business.

Marketing

It’s important to continue marketing in a challenging economy, but it may also be time to review marketing methods. From a marketing standpoint it’s expensive to attract new customers, but by building stronger relationships with existing customers smaller businesses can develop strong marketing policies with retention in mind.

READ MORE: Warning of "wave of insolvencies" as inflation begins to bite

Automation

Automating repetitive tasks and procedures increases efficiency and allows SME owners to focus on running their business rather than working in it. Examples of automation include providing instant email responses when customers contact the business online, tracking leads and sales, and posting on social media to stay in front of customers.

FINANCE

Alternative funding

With a wide range of alternative funding options available in the UK, small and medium-sized businesses can benefit from regular injections of cash throughout each month, or in some cases receive a cash lump sum.

Invoice finance is a form of alternative funding that uses the value of a business’ sales ledger to provide regular inputs of working capital. Other types of alternative finance include merchant cash advances, and asset-based funding where a sale and leaseback arrangement provides a lump sum of cash.

Alternative finance is typically easier to access than business bank loans. Even SMEs with a poor credit score may be able to secure flexible funding that’s tailored perfectly to their business.

Good management information is key

Business owners need easy access to reliable management information during an economic downturn – indeed, at any time, but this is crucial when the economy is widely expected to crash.

Knowing how many days debtors are taking to pay, for example, whether cash shortages are likely in the near future, and if sales targets are being met, are all vital pieces of information that can protect a business from failure.

Planning ahead and preparing for a downturn in the economy allows SME owners to act with speed, make decisions with more confidence when the time comes, and head off potential catastrophe for their businesses.