The UK economy is in a no-growth trough, bumping along the bottom and going nowhere in particular. Worse still, increasing numbers of pundits are starting to predict something worse for 2024, a ‘hard landing’ as bond fund giant Pimco puts it. The Bank of England Governor surprised markets recently by publicly describing economic conditions as the worse he had ever seen. So, given the current economic challenges and those that likely lie ahead, how can business owners and directors best manage their finances in 2024?
Vulnerable sectors
Some parts of the economy face the harshest challenges, particularly those which are directly consumer-facing such as retail, hospitality and leisure. They are battling not just the continuing cost of living and interest rate crises, but also the government’s stubborn refusal to address the urgent need for business rates reform.
The surprise drop of 0.3% in October’s GDP numbers also revealed problems elsewhere in the services sector, including IT businesses and worst performing of all, legal services where there was a 2.8% contraction.
The construction industry is also experiencing a distinctly bumpy ride with GDP falls in four of the past six months coupled with the uncertainties of the weather ahead.
Insolvency trends
November’s corporate insolvency figures from the Insolvency Service are good grounds for believing that 2023 may see the largest annual number of business failures on record, potentially eclipsing the existing record of 26,556 insolvencies in 2009 at the height of the global financial crisis.
Looking at the detail of these figures, they confirm the vulnerability of the hospitality industry, where insolvencies are 50% higher than pre-pandemic in 2019 and have gone up from 12% of all company failures in 2022 to 15% in 2023. Retail and construction insolvencies are even worse, rising by 65% and 54% respectively since pre-pandemic.
Size matters
We have published detailed sector reports into a broad range of industries in the past six months and in every instance, two characteristics stand out. The financial health ratings of smaller companies have deteriorated sharply in the past year, while their borrowings have increased substantially since the start of the pandemic. For larger companies, the exact reverse applies, with higher ratings and reduced borrowings.
Key strategies for surviving and thriving through tough times
Thankfully, there are a number of prudent steps that business owners and directors can take to manage their operations and finances through this tough economic period, the most important considerations of which are:
Keeping on top of financial data
This is no time to fall behind with management information, nor to shy away from the numbers because they don’t look good. Knowledge is very much power in this situation.
Concentrating on what you can influence
There’s only so much that can be done about input cost inflation, but there are plenty of options for mitigating the damage to profit margins through constructive conversations with customers.
Focusing on efficiencies that can offset rising staff costs is a good option in the face of rising labour inflation.
Interest rates have soared and look likely to stay high for the foreseeable future, but is there scope for renegotiating what lenders are charging or moving to a new funding source?
Dropping marginally profitable customers and product/service lines
Markets are very changeable at the moment and so are your customers given the cost of living pressures they face. For this reason, continually reviewing your revenue streams to check if you are trading with low margin or unprofitable customers, or offering products or services which only make a negligible contribution to your fixed costs, could provide a significant saving and allow you to concentrate your energies elsewhere. This is not to say you should abandon a loyal customer or client base, only that regularly reviewing your revenue streams will help you to negotiate less profitable area of your business model.
Focusing on cash collection and credit risk management
This is not just because cash is king in a crisis (although it is!), it’s also about avoiding bad debts. In uncertain times, some write offs are inevitable, but many are avoidable. If the profit margin is 10%, it’ll take extra revenue of £100,000 to compensate for a £10,000 bad debt.
Watching out for the early warning signs and act decisively
There are clear red flag indicators as a business deteriorates and heads towards a terminal outcome. By understanding them and what they may look like for your business, management teams can recognise them and act decisively and quickly. Facing business deterioration at the early stages will provide you with many more options than at the later stages of business decline.
Seeking advice early
Businesses have finite management resources, and few will have relevant turnaround or business rescue skills or experience to bring to the table. There’s no shame in calling in experts when faced with a crisis, or when there’s uncertainty about where a business is heading or its future viability. In fact, taking such decisive action can be the first step towards creating an even stronger and more profitable business for the future.
How we can help
We have extensive experience advising business owners and directors, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.