Green shoots seem to be sprouting with increasing regularity as we enter a new year, whilst the stock market continues to regain ground, economic indicators start to look positive, growth is seen in neighbouring economies and M&A activity seems to be rising. However there remain some very dark clouds on the horizon, not least the range of tax increases due over the coming months, rising unemployment and likely cuts in government spending. Nevertheless many businesses are looking to grow again, itching to get their businesses moving forward after almost a year of economic slowdown, but even that can be fraught with danger as historically more businesses tend to go bust coming out of recession than during one. With all this in mind, Orchard Growth Partners Principal Antony Doggwiler explains some of the simple steps that businesses need to take if they want to avoid the pitfalls of recovery and give themselves the best chance of enjoying “the gain after the pain”.
Successful businesses are often started in a recession
Received wisdom says that a recession can be a good time to start a business, and there are many companies that would support that view, such as Microsoft, CNN, MTV, Hewlett Packard, Burger King and GE (General Electric), all of whom started their paths to world domination during a time of economic slump (GE started in 1876, during a six year recession, for those with memories that don’t stretch back that far).
Learning from the big businesses that started during a recession
There are a number of reasons why new businesses succeed in tough times. They tend to be much more focussed on what the customer wants and values, and much better at exploiting gaps in the market place left by weak or disinterested competitors. They make the most of availability of resources and talent that become available during a recession. By starting during a slump, they tend to be much tougher than businesses that benefited from buoyant economic conditions during their development stage. They know the time is right for them and their product, and they are prepared to battle it out to succeed. Most importantly, they are not inhibited by their past, and are able to think of new and innovative ways to serve their market.
It therefore seems logical that existing businesses should look to learn from why new businesses thrive when planning their escape from recession. Many businesses have already had to rethink how they do business as the recession has taken its toll on profits and cash. Yet there is a big difference between surviving based on your current business model, and repositioning yourself in a way that will achieve real growth as the business climate improves. Businesses will need to show real leadership, communication and management if they are to develop the right growth strategy, which is properly planned and financed and has the best team of people to execute it if they are to enjoy “the gain”.
Business planning can be flexible and dynamic, not daunting
For many small and medium sized businesses planning can be daunting, and is something that is often only carried out when funding is required. It also is associated with the highly politicised large company budgeting processes that caused many people to flee towards more entrepreneurial businesses. However a proper dynamic planning process, which is highly flexible, regularly reviewed and against which progress is monitored, is essential for any business looking to move forward.
A good plan, as any investor who has to read hundreds of poor business plans will tell you, deals with product, market, customers, competitors, people and finance. It does not contain a hockey stick projection showing how everybody will be extremely rich in a couple of year’s time. It does contain a real analysis of the market place, its needs and the customer’s willingness to pay, details of why and how the management team will deliver, and an understanding of the financial consequences, both long and short term.
Consider the value of investing in your business team
When considering the people question, it is important to realise one of the key reasons that people invest is the quality of the management team. Note the word team. You can assemble a brilliant collection of talented individuals, but as any number of sporting examples will show, if you do not have the right mix of skills and aptitudes, you will not perform to your full potential. Understanding and managing the people in the organisation is critical to making the most of business opportunities.
Getting the right balance between such competencies as sales, finance and operations is important, and not impossible, even in small businesses. If it is not possible to employ somebody full time (something that is highly risky at the best of times), then make the most of the flexibility that currently exists, especially given the number of quality people that have become available as a result of the recession. At the very least make use of experienced individuals such as consultants, non-executive directors, mentors and coaches.
Financial management for small businesses does matter!
And finally, in spite of the comments above, finance does matter! It is a fact that businesses which grow after a recession tend to run out of cash because they often take on too many commitments and lose focus on working capital management. Whilst long term aspirations and returns are important to investors, managing working capital and selling profitably is the key to business survival. It is a concern that rather that being lean and mean, many businesses have just been mean and cut everything back to the bone, which could leave them over stretched as they try to grow again.
The basics of financial management remain critical. Understanding how the business works financially and where profit and cash are generated, regular cash flow forecasts and up to date management information with key performance indicators and early warning systems, will not only improve the chances of business survival but will also provide evidence to potential sources of finance that a business is likely to deliver financially.
It’s getting better, but be prepared
The last year or so has been tough, but maybe more businesses have survived than might have been expected. There are signs that a turning point has been reached, but there are still some clouds on the horizon. Therefore it will not be possible to rely on economic growth alone to grow a business. Coming out of a recession can be a dangerous time, but if a business plans properly, keeps learning and developing, stays flexible, gets the best out of its people, ensures its products and services remain relevant and sticks to the basics when managing its finances, there is an excellent chance that it will achieve “the gain after the pain”.
Thanks to Anthony Doggwiler for his contribution to this article.
