The last few weeks have been bruising, difficult and uncertain for everyone. But spare a thought for one group in particular – economists. These poor wretches must be pulling their hair out, or at very best ripping up pages and pages of carefully calculated forecasts.
Helm runs regular online sessions for members featuring guest economists. In November 2021 and January 2022, these economists were relatively upbeat. The consensus – pre Putin’s invasion of Ukraine - was that there would be some post-Covid-induced, inflation. It would potentially hit 6% before dropping back. Interest rates might also have to bump up a fraction to help keep it under control.
By June, economists were far less upbeat. Inflation predictions were well into double figures and more serious interest rate rises were expected as a result. One predicted that the only effective brake on inflation would be to allow the economy to slide into a short recession.
And now, here we are. October 2022. Phew! Inflation looks set to remain stubbornly in double figures for quite some time and could hit the high teens. It is likely that interest rates will rise closer to the 6% initially predicted for inflation. For many borrowers - household and business - this will be a disaster.
And yet neither of these factors are the headline economic story. Unthinkable just a few weeks ago, the pound is edging toward dollar parity and the new government is committed to an almost-unprecedented fiscal easing. As hard as the Bank of England steps on the brake, the Treasury is determined to stamp on the accelerator. The economy, to continue the analogy, is going into a nasty spin.
Recession-proof your business
In the aftermath of the 2008 financial crash, Brexit and Covid we seem to be entering a period that might become known as the age of the Black Swan event. That unpredictable, disruptive events are happing with an almost predictable regularity means business founders need to be ready for anything.
So, how can you prepare for the unknown unknowns?
- Ignore the economic forecasts. Expect and prepare for the worst, even while you hope for the best. Make sure you have enough cash in the bank. What kills businesses is a lack of cash. But with inflation rampant, don’t keep too much cash in places where it will just devalue. Invest where it makes sense (either in the business or in financial investments that, if at all possible, deliver an above-inflation return).
- Invest in improving your business. As long as you have the cash you need - and that will vary from business to business – then investing the rest in things that make the business more profitable or help it grow is a good way of getting a decent return.
- Keep an eye on cash flow. It’s the metric that matters more than any other. You need to know that you have the cash you need and you need to know how sensitive your cash flow is to external shocks. What would happen if events took away 90% of your turnover overnight (hello, Covid)? How long would the business cope? And right now, it’s safe to assume a situation where the government doesn’t have any money to lend to bail businesses out.
- Know the metrics that matter. How can you tell if your business is in the early stages of failure? There may be lots of small indicators that can help you identify problems and take swift action. Debtor days, for example, may start extending gradually. You don’t notice until you get to month end and there’s not enough in the bank to pay salaries or your tax bill. A good finance director should help you stay on top of the metrics that matter to your business.
- Look at your product mix. Is the offering still right for this new market condition? Do you know the margin of each product? Which mix of products to which customers is the most profitable for your business? Has a change in economic outlook made it harder to shift premium products? Should you pivot to a value range?
- Review your marketing. Which doesn’t mean cut it or stop doing it. But review if the message is still on point for this new climate. Emphasising value for money can work, if it's authentic. There’s lots of evidence to show that brands that continue to invest in market through a recession are the ones that emerge from it in the strongest position. Just make sure it's the right marketing.
- Keep an eye on costs. There is no need to stop doing things that made you successful, but there is a not to waste money. That is true in good times as well as bad, but it's inevitable that in better times bad habits creep in. That expenses policy might not be so tightly enforced. Even if you are not be splashing out on the lavish company jet, it's still worth reviewing long-term contracts. Sometimes there can be other gains from efficiency savings. Reducing waste usually also has a positive effect on your environmental credentials and carbon footprint.
- Talk to your peers. There aren’t many people who know what you are going through as a founder, as you steer a business through the choppy waters of what now looks like an inevitable recession. In many ways this is why Helm exists; to provide a safe space where like-minded founders can share their vulnerabilities and challenges. But it is also where you will find someone who’s already been through what you are going through now and will be happy to help with a solution.
Helm members can join our online discussion with Greg Palfrey, national head of restructuring and recovery at Evelyn Partners, and Helm member Thish De Zoysa, founder of Their Perfect Gift on How to to recession-proof your business on Thursday 13 October .