Home  Latest News Recovery set to be harder for SMEs
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Recovery set to be harder for SMEs |
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News from the National Institute of Economic and Social Research (NIESR) saying that the recession is officially over was initially met with a positive reaction from many Scottish SMEs.
But according to private equity firm Octopus, the start of the upturn might not be such good news after all. They say a sudden increase in orders will bring a new challenge to SMEs as they stretch to meet the long-awaited increase in orders.
Octupus’ head of private equity, Chris Allner, said: “Signs of economic recovery are welcome news, but for small to medium sized businesses the recession will cast a longer shadow.
“It seems contradictory that the strongest SMEs, having survived the worst of the downturn, should find themselves at their most vulnerable in the recovery - but it’s a fact and businesses should do all they can to be prepared.
Allner believes the main problem for SMEs throughout a recession is cashflow and this is often squeezed even harder in the early stages of a recovery.
He said: “As the economy picks up so do the order books and with low stocks, businesses need to find cash to buy supplies to meet the new orders. Some businesses will use the last of their cash and others will seek out a loan – if they can find one – and this is often where the trouble really starts.
“The good news is that there are some simple, practical steps businesses can take to avoid this trap and survive this testing time.”
Top tips for SMEs to weather the early days of an economic upturn
- Put together a clear and realistic cash flow projection. This will prove invaluable and help your company avoid over trading. Accept and plan for the fact that customers will sometimes take longer to pay than the standard terms.
- Make sure you have a full list of all your creditors and your debtors. Prioritise your creditors so you know who you can, or have to, pay first. Tally this list against the payments you are expecting so you can manage your creditors’ expectations about when you can pay them.
- Be honest and open with your suppliers. Don’t tell suppliers the ‘cheque is in the post’ if it’s not. This will only make the supplier distrustful of you and increase the likelihood of them cutting off supplies or even taking legal action. It’s far better to tell suppliers when they can realistically expect payment, so they can plan their own cashflow.
- Scrutinise your expenditure. What in good times appears a ‘must have’ quickly becomes a luxury in tough times. Ask yourself ‘is it really necessary?’
- Make cost cutting decisions sooner rather than later. Businesses often delay making these tough decisions and too often too little is done too late.
- Talk with your employees. They may consider taking a short term pay cut in return for longer term benefits such as stock options and share bonuses in the future. Good employees are hard to find and wherever possible you want to keep them.
- Find an alternative source of finance for your business. Consider invoice discounting, talk to your bank, or, if your business has a property you may be able to remortgage it. You might also be able to use a trade financier to buy your stock for you and for you to pay them back up to 120 days later in return for a fee.
- Consider getting equity finance into the business – from staff, friends, family, local business angels or private equity.
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