In the current climate of apparent worldwide economic crisis there has been a traumatic worldwide economic meltdown which has put the world economy as we know it at risk. There are many businesses who will not survive but there are some who will not only survive but will benefit in these unfortunate times. For instance our business in web design has increased recently because in an effort to reduce costs companies are turning to the internet to improve sales without incurring huge overheads. So companies like ours suddenly are in greater demand. However for the majority of the population it is a question of surviving and getting through it. If your business is on a sound financial foundation and you have money behind you then this will be beneficial in the coming years. You may even be able to reduce employee salaries for a period of time, rather than have lay-offs or even closing down, but whatever strategy you apply it will need to be with the agreement of the workforce because a company is dependent of the good will of its employees at such a time. During the early stages of the crisis the British company JCB, which makes big machinery like bull dozers and diggers, chose with the agreement of the workforce, to reduce everyone’s salary for 6 months rather than lay off people or go out of business.
Cash flow
Most businesses go to the wall because of problems with cash flow. If there is not enough revenue coming it to pay for goods and services then it will not be long before a company goes into bankruptcy. Constant monitoring of the financial position is crucial. It is so easy to spend and not realise how much is leaking out and where it is all going. Keeping a tight control on costs is always a vital activity because that is what makes or breaks a company. More profits always come from reducing outgoings whether it’s reducing waste or cheaper purchasing or decreasing the workforce. I once listened to an audio tape on how to become wealthy and the one item to impact me was the advice to plug the leaks. Most people when running short of money try to find a way of making more money, but without a balance of reducing outgoings they never seem to resolve their problem. The simple reason is that when people earn more they spend more. If you imaging a bath with the tap turned on to fill it up. If the plug is securely in place the bath will fill up fairly quickly. But if the bath was full of holes no matter how much water you pour into the bath it will never fill up. The analogy is that the bath is your bank account, the tap is your earnings and the holes are your spending. Since listening to that tape, I have made a point of keeping expenses to a minimum at home and at work and every little sum of money coming in I see as a positive step to achieving wealth. To achieve sustainable wealth it is essential to take control of your spending and plug the leaks.
Avoid buying anything unless you absolutely have to or adjourn some necessary purchase for a few more months if possible. It’s amazing how you can manage without something for a period of time by using up existing or old stocks and making sure that waste is reduced to an absolute minimum. One of the things we teach early on is that being good with finances is often just a case of regular monitoring and being aware of what is going on with your finances.
Look for Bargains in Purchasing.
When you do have to procure goods to run the business, make sure you look out for bargains or negotiate for a better deal than you may have achieved previously. When times are tough, sales with no profits are better than nothing and there are some good deals to be had. One company I recently heard about sold a house for half the price when a customer came along with a cash offer.
We were recently tasked with setting up website hosting on a very low budget for our client www.electricitypricecomparison.net we actually found hosting companies who are now providing free website hosting if you buy your domain name through them. So just because you have a pre conceived idea that something has to be paid for, or costs a certain amount, it might not necessarily be the case and it is worth investigating all markets and reviewing all costs continuously.
Look at your Spending in purchasing.
By taking a good long hard look at all of the business overheads I am sure it will be easy to identify those areas similar to ours where you have large outgoings. If those costs are vital to the functioning of the business then looking for better deals with other providers or renegotiate with current provider to maybe save thousands of pounds. So in many ways the current economic climate could be seen as a good thing because it forces businesses to review their outgoings and get rid of the dead wood. In any business, the higher the outgoings, the smaller the profits. When there is an economic downturn or some loss of business unless you have unlimited capital set aside, it is vital to reduce spending otherwise the business will not survive. Most really successful businesses understand the value of controlling outgoings and constantly review costs, even when times are good. I always remember my mother and grandmother saying of someone who was well off, that they were rich because they never spent their money, they hung onto it.
Tighten your Belt - Eliminate Fancy Spending
Although looking at reducing large overheads is one way to improve the viability of your company, another is to pay attention to the small amounts going out. It is so easy to think ‘Oh it’s only a few pounds’ but small amounts add up and can so easily get out of control. Remember that old saying ‘take care of the pennies and the pounds will take care of themselves’ I think it is so true. So cut out unnecessary spending, no perks on the business such as lunches or dinners to woo customers. They rarely actually need it if your business is offering honest value for money and top class services, and in most cases customers and prospects will appreciate you being prudent if it means you stay in business and continue as their valued suppliers. Bosses can lead the way by paying themselves less or taking a pay cut showing that they are willing to tighten their own belts.
Recently it was announced that Bruce Forsythe was taking a cut in salary for his position as the host of Strictly Come Dancing, one of the most popular programmes on TV at the moment. He believed that they were being paid too much and put his money where his mouth was.
Another major area of expense is salaries and the costs that go with them. If you employ a large number of people the overhead expenses are huge. However there is always a natural wastage where people leave or retire so without actively having to make people redundant there may be chances to reduce the wages bill when times are hard. Efficiency and effectiveness of the people working in the company is critical and communicating with the workforce as to how they can reduce wastage and be more effective can be a rewarding policy.
One example from my previous work in organisations was when running a supervisors workshop. One of the delegates was complaining that when he needed to order supplies he had to sent the request up the line and wait until the senior manager had given the go ahead. As he was responsible for keeping supplies stocked and felt very frustrated at the time it took for him to get the approval he needed. I was shocked to hear that he was being so hampered in doing his job properly. So when I asked the question. ‘What’s to stop you ordering the goods yourself?’ after a long think, he said it had always been done that way. Nobody had questioned the procedure and whether it was still necessary to follow it. The outcome was that the he was given the go ahead to do the ordering himself and the senior manager was freed from one task he could happily do without.
Do Your Customers have Financial Fluidity?
If one of your customers is a very large company and they are source of the majority of your revenue then you are in a high risk position. It is a good idea to ensure that you have more than one high volume customer as well as lots of smaller ones so that you will be covered if one suddenly defaults on payment.
Find out the financial viability of your best customers. When the income of a customer falls then their ability to purchase goods and services is affected. If they are able to pay, then you will be able to pay your suppliers. There is nothing worse than doing a lot of work or selling a lot of stock to customer and then not getting paid. Situations like this can often cost you money, and that is the road to financial ruin, so be sure to be aware of your client’s economic situation as best as possible. We use the free Dunn and Bradstreet financial tracking service to identify any negative changes registered against any of our major clients
We recently heard about a town planning EIA provider whose client went into liquidation owing them in excess of £10,000, fortunately because of their healthy cashflow and low gearing they survived this huge loss.
Find out the financial viability of your best customers. When the income of a customer falls then their ability to pay for goods and services is minimised. If they are able to pay on time, then you will be able to pay your suppliers. There is nothing worse than doing a lot of work or selling a lot of stock to customer and then not getting paid. Situations like this can often make the difference between success or failure. The cost to you in money and wasted effort and resources could be the road to financial ruin, so make sure you are aware of your client’s economic situation as much as possible. When the financial crisis happened one of our best customers suddenly switched to a two month payment plan which meant that we did not get any money from them for a month. When we protested the chief executive told his manager to find another suppler. There were a number of outstanding invoices worth thousands of pounds and we were powerless to do anything. Our overheads were compromised for that month but we were fortunate enough to have access to a reserve fund to tide us over. And yes we did get paid the whole amount over time.
Avoid Borrowing Money
When the world is in a financial meltdown it is better not to borrow money if you can help it. If you have already borrowed significant sums of money then make sure you talk to your bank and get the best deal on repayments you can. If it’s possible to repay a chunk of money to reduce the interest you are paying out then do so. To me interest is money going out for nothing in return and is not good money management.
Having said all that, the interest rate in America is just over 1% and recently rates have been radically reduced in the UK. But that in itself is what caused this whole financial mess in the first place. People borrow money cheaply then re-lend it at a higher rate of interest and take the difference in profit. Once the interest rate rises to a more normal level they will bail out and take their billions off to buy an island somewhere while everyone else pays the price. I know that is an over simplification of the problem, but it serves to demonstrate that the greed of a few has caused the distress of thousands of the majority.
In my property rental business, a few years ago I had to let a house at a reduced rent but found a good long term tenant. This meant that the income was only just covering my costs but subsequently, because of the drop in interest rates, the mortgage repayments on the property have been reduced by £150 a month. This means I have been able to realise a small profit and with that money I am reinvesting it in improvements to the house. Long term I see it as a good investment to maintain the standard and value of the property. So for some companies who have had to borrow money to stay afloat there is the benefit of lower interest rates to reduce the burden of repayments.
You Only Have to Make it Through
The world economic climate is currently, I realise, much more complicated than we are suggesting above. Although it is true that the simple way of managing crisis is often the best solution. If you cut everything back to the bone and try to emulate the days when people did not have such complicated lives, it can allow you to get on top of a situation. Years ago people used to manage their company without armies of specialists to provide tax advice, they coped with no water coolers and other such luxuries like cleaning services and people who come round every few weeks to sanitize your telephones! they coped by carrying out additional work themselves when they needed to or they just went without. As your company regains its footing, or recovers, it probably won’t make economic sense to sit and trawl through your business accounts doing book keeping yourself or to have to do a lot of extra research and administration, so you can restore those facilities that help to make you more money once the business has recovered.
Now I am not suggesting that we should go back to the good old days. What I am saying is that we might think we can’t manage without all our latest gadgets such as mobile phones that take photos, but the reality is that we can do more with a great deal less, as long as we put ourselves into the right frame of mind and think positively about what we can achieve rather than what we haven’t got. Obviously as your business grows, or recovers, it doesn’t become economically viable to sit and trawl through tax return forms or to have to do a lot of extra research and administration yourself, so you can restore those facilities as and when you have recovered your financial equilibrium.
Think what the Victorians did with the limited resources they had at their disposal. The horse was the main mode of transport and they used the manure to heat cold- frames and managed to grow pineapples without any other form of heating. They did not have cars, computers, mobile phones or even phones. The railway was only just coming into being, and they did not even have electricity. But with their energy and ingenuity they conquered the world. The industrial revolution with their steam driven engines changed our economy for ever. In the past there was no such thing as designer and yet businesses survived|thrived.
Stay in a Positive Frame of Mind
By this I do not mean be in denial and pretend the world is not going through a financial challenging time. But if you are continually thinking and worrying about the negative aspects of the financial situation, then you are likely to make it come true. Don’t forget you get what you wish for and by concentrating on something then it will work like a wish, so why not concentrate on ways of getting new customers, giving better value to your existing customers and how your company could offer new products or services to your existing customer base?
Conclusion
Although during this recession there is no doubt times are hard for people who have lost their businesses. No work, equals no money coming in, so how do people pay their bills and their mortgages? If consumers have been prudent during times of prosperity and they have a nest egg for a rainy day, then they can probably manage for a few months until they get another job. But if they are already up to their eyes in debt then they will face personal bankruptcy and could lose everything.
In spite of all that, some people are managing quite well if they have jobs or some other type of income. One article I read recently said that the death rate reduced noticeably during recession and put that down to eating more economically at home and not eating so much junk food. So OK we can’t afford to go out for meals as much, and things are more costly, but home prepared food is often better for you and sharing meals with the family is a way of coming together and communicating. So it’s not all bad. Good luck for a prosperous future.
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