This week, the Bank of England actioned the biggest interest rate increase in 27 years, and warned that the UK faces a long recession starting before the end of the year and lasting 5 quarters. If this prediction comes true, it will be the longest slump since the financial crisis in 2008.
Businesses will understandably be concerned about what the prospect of such a long recession means for them. It is particularly unfortunate that we are experiencing a time of political uncertainty, when it is not clear who will be Prime Minister when we dip into recession. This means that just at the point where they need to be strategically planning to ride out the recession, businesses have no way of predicting what kind of support may be available to them from the government. After years of turmoil caused by the pandemic, Brexit, and the war in Ukraine, this additional uncertainty is far from ideal, and many businesses will want to come up with an immediate plan to help themselves, rather than wait to see whether Rishi or Liz have a plan up their sleeves!
Although realistically no business can confidently claim to be 100% recession proof, there are steps that you can take in order to give yourself the best possible chance of riding out the next 5 quarters in damage limitation mode!
Overheads and Costs
One of the most important things you can do is a costs analysis to help you understand where savings can be made. This will help you maintain profit margins, even when the inevitable happens and sales fall. Looking for areas where you can cut down without compromising on the quality of your product or service is key. Perhaps you can spend less on advertising or administration, or cut down on your office space given that many workers are now well set up for working from home. You could also look at tying in these cost savings with a drive to be more environmentally friendly, for example by cutting down on excess packaging, switching to electronic communications from postal, or installing solar panels (which after an initial outlay could pay for themselves and more in energy cost savings year on year).
Minimise debt
Many businesses had to take on a considerable amount of debt during the pandemic to survive, but of course an increase in interest rates now means the cost of paying back this debt could skyrocket. Even if you are not able to do anything about the amount of debt you have right now, as a minimum you should have a plan for what you will do if you reach a point where revenue drops and you cannot pay back your debt. You can talk to your accountant about the different types of business structures that you might wish to consider.
Diversify to survive
As many businesses discovered during the pandemic, having one good product or only one way of doing things leaves you vulnerable when external forces, such as Covid-19, come into play. The same applies to a recession, the more you are able to diversify the better your chances of survival as consumer behaviours change. You should look at this as an opportunity that will stretch beyond the life of the recession too; think of all the restaurants who pivoted to take away and at home meal kits while hospitality was shut down during the pandemic, most of whom are still providing those options as an additional option now alongside their original offer. Read our blog about pivoting to find out more about how to approach diversifying your business.
Consider your workforce
It goes without saying that nobody wants to make anyone redundant during a recession. Employers have a duty of care to their employees in bad times as well as good, and with families already feeling the cost-of-living squeeze, losing a job could be disastrous for their individual circumstances. However, getting your business into a position where it potentially fails, losing everyone their jobs, is not going to help anybody either! In the months leading up to the start of the recession you will want to carefully consider your staffing levels; it may be possible to utilise part time working, or in a worse case scenario a pay cut, to ensure that you can avoid redundancies whilst also securing the business’s future. Other obvious steps include not covering parental and other leave, and not replacing people who leave or retire, in effect a recruitment freeze. Although this may put pressure on your employees in terms of workload, if it secures their jobs then they may consider it a price worth paying on a temporary basis.
Many businesses may also consider whether their employment structures might change in order to allow for more self-employed and contractor working. While this can potentially save money, businesses should be extremely careful not to fall foul of IR35 legislation in this regard. If you are considering using self-employed contractors, your accountant can offer advice, and if you have purchased Fee Protection Insurance from us you also have access to a team of qualified employment law solicitors through our Legal Helpline.
Create a strategic plan
Most businesses will want to get ahead of the recession rather than adopting a ‘wait-and-see’ strategy, and for this you will need a recession management plan. You will want to think through all the potential problems that a recession could cause, not just a fall in sales but also scenarios such as your suppliers going out of business, loans being called in, and anything else which might knock your business off track. Then, using the ideas above and including ideas of your own, you will be able to come up with a plan to cope with anything that the recession throws at you. And who knows, you might even benefit from the recession if your planning leaves you as the last business standing in your field!
For advice and support on recession-proofing your business, talk to one of our team.
