The business pages attest that the pain has already spread beyond the banking industry and is being felt in sectors such as construction and retail, while consumers are noting sharp jumps in the cost of filling up their cars, heating their homes and buying basic food items. We can expect a further raft of grim economic indicators over the coming months, as statistics from unemployment to bankruptcies take a sharp turn for the worse.
It's a very different world from that of early summer 2007, when banks would readily extend multiples of credit and demand very little in the way of security. While most purport to be still ready to lend, the severe dents they have suffered from sub-prime losses have altered the whole business environment and one evident result is that asset-backed lending is returning to prominence.
In this bruising environment, smaller and medium-sized enterprises are at risk of taking the hardest knocks. Despite tentative signs of the shortage of liquidity easing, it's clear that borrowing money will continue to be much tougher than in recent years, which were marked by an unusually benign credit cycle. Those SMEs blessed with a shrewd finance director will have taken advantage of these conditions, using them to reinforce the balance sheet and line up funds to meet corporate strategic business plans.
But other companies lacking this safety margin must simply ensure that they run a tight ship to survive the choppy conditions ahead. The UK's late payments culture appears to have worsened in recent years - even before the credit crunch took hold - despite legislation aimed at improving the situation. So companies need to be vigilant in chasing up late payments and outstanding invoices.
It cannot be denied that this is a time-consuming process and a major drain on the resources of SMEs. But customers allowed to fall behind with their payments frequently enter into a cycle from which it is difficult to break free. Failure to chase an outstanding payment could well result in no payment at all being received. Small businesses depend on a regular and reliable cashflow for the smooth day-to-day running of the business. Any SME that fails to act on money owed to it will soon experience damage to its bottom line and should also exercise caution in extending credit to new or growing customers.
Another task that involves an element of ‘biting the bullet' is updating the company's forecasts and budgets to factor in the effect of less favourable economic conditions. The action will hardly be welcome, but the past year has proved that delaying bad news - anything from a profits downgrade to an increased loss provision - merely compounds the damage. Several venerable financial institutions have done little to endear themselves to investors by going cap in hand only weeks after assuring them such a move wouldn't be necessary.
After the aggressive spending spree that fuelled the mergers and acquisitions boom up to mid-2007, private equity deals based on leveraged terms have been cut back down to size. But for a number of businesses, long-term survival may depend on a union with a rival to release synergies and cost savings. So the next couple of years could see a number of friendly takeovers or ‘merger of equals' deals, particularly in sectors worst hit by the downturn.
If many of these actions smack of defensiveness, tough economic times can also be used by an SME to sharpen up its act. If the budget for advertising
is limited, then review which media you are using and the cost-effectiveness of each. Ensure that in addition to securing new enquiries, you follow each one up promptly. Although sales and marketing efforts demand considerable resources, back-up levels of service are just as important if potential new leads are converted into customers and existing clients are to be retained.
Hard times and restricted budgets could tempt some SMEs to cut back on their insurance, but to do so would prove a false economy. Covers such as property damage to business interruption are an essential part of any company's insurance portfolio. The past few years have demonstrated how businesses can be suddenly disrupted by unforeseen events, ranging from minor yet still costly incidents such as a power outage to occurrences such as the Buncefield oil depot explosion, the July 7 bombings in London and last summer's widespread floods.
Any gap in insurance cover could easily shut down a company for good, or make it easy prey for a bargain price acquisition by a predator. Added to which, insurers are keenly competing for business and conditions for the insurance buyer are favourable. Companies can also help themselves by making better risk management a key policy and ensuring that senior managers and employees on the shopfloor share risk awareness. A well-protected business that can respond swiftly when something goes wrong can survive hard times and secure the investment that has become harder to win.
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