Prior to the last recession business was booming, or so I thought. But disaster was on the horizon. I hadn’t got director guarantees on the credit I had given out. Although I had credit checked companies, once the recession took hold many went into liquidation. Ultimately leading to the liquidation of my company.
Lessons learnt I started up again. This time very mindful of what had happened and needing to “recession proof my business”. The steps I have taken in many ways may have stunted the growth of my company, however that compromise has produced stability.
Some of the solutions I came up with might not be suitable for every business but some of the ideas might give you food for thought.
We stopped giving credit. Every customer paid up front for our services. We are not a bank, if customers want credit then a bank can provide overdrafts, credit cards and loans. This was unheard of in our industry, everyone gave credit, but we were confident in our products and the loyalty of our customers. You might think we would lose customers, we did - about 25% but they were the customers that never paid and cost us the last business.
The payment gateway on our website, Paypal, now offers our B to C customers 4 months credit subject to terms. That arrangement is between paypal and the customer, so we get our money regardless of whether the customer pays paypal or not. This aided our cash flow and enabled the next step.
We stopped getting credit from our suppliers. But why? you ask, that is a free credit line. Because when the last recession hit when we couldn’t get money in and we couldn’t pay suppliers. But now we have money up. However, paying for the month previous only works if your next month takings are greater than the previous month expense.
Going into a recession with declining takings is much much easier when you are only paying for the goods you need, not the goods you bought last month. With taking money upfront we mostly just buy the goods we need with a bit of excess to hit discount bands or minimum orders for free delivery etc.
Just in time ordering. Buy what you need, when you need it. Know your stock and buy the supplies you know will sell or get used in a quantity that is reasonable. (Keeping this of the moment) Buying 200 toilet rolls when you use 2 a week is pointless when a couple of months supply would be adequate. Money tied up in dead stock can be better spent elsewhere.
We moved from being a Business to Business company and became a Business to Consumer company. This increased our profits on the products we manufactured, and was a gradual process over 6 years. We still supply some businesses, but they account for only 10% of our turnover. Our website helped us achieve this.
Then last year our forklift broke down, beyond economic repair. So, we got a loan. I know I said credit was not in the plan, but the loan I found fitted in with my stability plan. I mentioned we used paypal as our payment gateway.Paypal have a loan scheme too and will lend you up to a third of the turnover you put though them each year. This loan is very very different from the loans you get from the bank. You do not need to submit a business plan or jump through hoops; you just need a track record with paypal. There is no interest, just a fixed fee. That fee varies and they have an online calculator. You pay the loan back every time you make a sale as a percentage of the sale. We chose a loan of a 15th of our turnover and chose to pay it back as 10% of our takings. This loan scheme fits in perfectly with our recession proof plan because if we turnover less, we pay less of the loan back. There is a minimum payment, but it is so small that it was not of any concern. There is a draw back to the loan if your takings increase as you pay the loan back quicker and effectively the fixed fee, if it were interest, becomes a higher percentage per annum. This has actually happened to us, ie the loan should have taken 18-20 months to pay off, but we have managed to nearly triple our sales this month and we are currently projected to pay the loan off much quicker. But it is better to be in a position of being able to afford an effectively higher interest, than not being able to afford a traditional loan with fixed monthly payments. You could take on a second payment gateway such as Klarna or Worldpay as a way of reducing the rate you Paypal back if you found yourself in this position.
With the recent events going on in the world and the likelihood of the UK entering a recession or even a depression in the next year or two, reducing your exposure could be a way to help protect your business.