Starting a business in a recession
12 Nov 2009
It takes courage to start a business when the wolves are not only at the door but running through the streets. Those who do so very quickly learn to focus on the basics. Buss Murton Law Solicitors offer advice to entrepreneurs in these tricky times.
The key factors that determine the success or failure of a company are the owner's ability to manage cash flow and to ensure that the service or product is delivered on time and on budget. Cash flow requires a solid understanding of the businesses main expenses - typically staff costs, supplier costs and the cost of premises - and of the main source of income.
A company can pay it bills only when there is cash in the bank and many entrepreneurs will find that their cash is tied-up in debtors, stock and work-in-progress. Businesses that have low stock holdings, few debtors and a short sales cycle will tend to have better cash flow.
As a direct result of the recession we at Buss Murton are seeing very few businesses starting-up where the business model requires them to wait a long time for a debtor to pay; in fact, anything over seven days is now seen as a long time.
The old adage that ‘cash is king' has never been truer and cash payment on invoice is the safest model, especially for a start-up business which generally has to pay cash for its supplies. The recession has also seen fewer businesses launch that require large stock holdings. £50 000 sitting on a shelf in a warehouse is worth nothing when the landlord needs the rent.
Staff costs are often the highest single bill a business has to pay each month and it often pays to be as creative as possible with staffing needs. Work from home, flexi and part-time or job-sharing solutions often mean that a company is paying only for the productive time of its staff. There may be a little more administration involved in setting-up a flexible team of people, but they can be sent home when it is quiet and pulled in when it is busy. In a recession employees are more likely to embrace this flexibility and when the economy once again picks up such flexibility can also add to achieving a healthy work-life balance across the whole business.
The last factor is hard work. In a recession a business owner will undoubtedly have to do more. The luxury of extra staff and out-sourced services are forgotten and put aside. Businesses will often exist with just the bare bones. Each decision is analysed to ensure that it fits with the delivery of the customer's needs and the business' cash flow needs.
Yet these are good disciplines for all businesses - whether launched in a recession or when times are booming. It is said that businesses launched when times are tough are leaner and tend to have a tighter grip on finances, often through necessity, and are well placed to really take off when the wider economy picks up.
Any entrepreneur considering setting up or running a young business would do well to remember the mantra ‘turnover is vanity, profit is sanity and cash flow is reality'. In a recession the reality of having money to pay the bills comes into the sharpest focus.
Buss Murton Law advise both small start-up businesses as well as older, more established firms.