Mark Perrin, advisory partner at accountancy firm Menzies LLP, offers some advice ahead of the expected recession
WITH  the economy slowing and UK inflation rising at a record rate, the cost of living crisis is being felt by households across the UK, and the situation is expected to worsen in the months ahead, especially once the energy cap rises again in October.

So should businesses be preparing for another economic recession?

A Financial Stability Report, published recently by the Bank of England, has warned that the economic outlook for the UK and globally has "deteriorated materially" and the UK inflation rate is expected to reach over 11 per cent by the end of the year.

Even though the UK economy grew slightly in June, its contraction in the two preceding months suggests that it could be heading for another recession.

Few businesses expected to feel the pressure of another economic downturn so soon after the pandemic. However, those that performed strongly through 2020 and 2021 will be best placed to ride out the challenging times ahead.

Largely out of necessity, many organisations adopted a more agile approach to decision making and business management at the start of the pandemic, when orders dipped dramatically or disappeared altogether. In many cases, this agility has stuck and become part of their more resilient business model. Many businesses also already have a strong network of third-party advisors in place to support their decision making in the months ahead.

Know your customer

The worsening cost of living crisis, with its likely effect on consumer spending, is expected to bring different trading challenges for businesses.

Instead of switching products or services to boost revenues, businesses may need to mitigate risk in some areas by reducing their reliance on customers with a higher financial risk exposure – those most likely to be affected by a dip in consumer confidence.

Credit checks should be carried out regularly to track customers’ performance and sales and procurement teams can also provide useful market intelligence. Businesses should also make sure they have an accurate understanding of what makes an ‘ideal’ customer, versus those that are higher maintenance, or deliver less value due to reduced operating margins.

Don’t get caught out

Depending on the company’s operating model, an economic downturn could cause some businesses to get caught at the wrong point in their working capital cycle. In other words, they could be left with excess stock or work in progress that they are unable to realise value from.

This could be a particular problem for businesses that have been impacted by global materials shortages, as many have chosen to increase inventory and production rates, to get ahead of the demand curve in recovery. Having a range of suppliers to supply critical products and services is also important and mitigates the risk of any one supplier failing during an economic downturn.

Practise proactive cost and cashflow management

In a climate of rapidly rising costs, if revenues start to dip, the situation can escalate into a financial crisis quickly.

Businesses can take action immediately to mitigate cashflow risk by practising proactive cost and cashflow management. For example, it may be possible to negotiate better credit terms with key customers and longer payment terms with key suppliers.

Due to the high rate of inflation, all businesses should keep their prices under review and pass cost increases on to customers where necessary.

Secure more headroom

For many businesses, economic recession is as much a time of opportunity, as it is a time for battening down the hatches. However, in order to capitalise on market opportunities by recruiting skilled staff or assets for example, businesses need to have sufficient headroom in terms of funding. While borrowing comes at a cost and repayments must be met, some businesses may wish to secure a ‘safety net’ now, before funding becomes harder to come by.

Focus on debt management

Another way to protect cashflow is to focus on debt management, to ensure any outstanding money owed to the business is paid as soon as possible.

If interest rates rise and loans paid to the business become more expensive to service, some businesses may wish to restructure their debt finance to reduce cost in this area.

Lead the workforce

Business owners must lead from the front and take a proactive role in communicating and motivating the workforce. This will help them to retain skilled people and maximise performance, which is as important now as it was during the pandemic. During an economic downturn, staff may need additional support to maintain their morale and wellbeing.

Look to the future

Whatever happens in the coming months and into 2023, businesses can’t afford to get stuck in fire-fighting mode and they need to maintain a long-term, strategic overview.

Using best practice techniques such as scenario planning, supported by reliable financial information and forecasting models, can help businesses to make the most of growth opportunities during the downturn.