When Kirsty Birnstiel opened her make-up shop last year in Chiswick, west London, offering treatments as well as products, she had no idea that the buoyant economic climate would change so quickly. She is already seeing signs that the credit squeeze is having an effect on her business.
“This year people are more careful with their money,” she said. “A few times people have said they will wait until they get paid and then come back. The times when people didn’t even ask what things cost have gone.”
Aware that her customers are starting to feel the pinch, Birnstiel has taken several steps to make her business recession-proof. She has reduced the price of her regular treatments and introduced a range of cheaper micro-treatments, which are proving popular. These include a 15-minute mini make-up recharge for £15 and a smokey-eyes masterclass for £20.
She is concerned about the impact a full-blown recession would have, but she is confident that taking precautions now will pay off. Birnstiel also points out that, in previous recessions, sales of lipstick have gone up while sales of designer clothes have gone down. Make-up is an affordable luxury.
“Women will still want to look good and it is easier and cheaper to refresh your make-up bag than your wardrobe,” she said.
The word recession can strike fear into even the most confident entrepreneur and owners of small businesses can be forgiven for quaking more than most. The way to survive, though, is not to put your head in the sand but to be prepared, realistic, and to take positive action.
George Derbyshire, chief executive of the National Federation of Enterprise Agencies (NFEA), said: “What concerns me is that we have had good times now for the best part of 15 years, so there are a lot of people around who have never really had to cope with difficult times. Some are going to get caught out.”
There is more talk than hard evidence of recession at the moment, but small firms need to be prepared. The first step, he said, was to look at your financial forecasts. “It is time to look at projections critically and make sure they are still appropriate for today’s conditions.”
Keep a particularly close eye on your costs, ideally involving your employees because they are likely to know better than you where money is being wasted.
One thing you should not touch is your marketing budget, said Derbyshire. “It is an easy option to take an axe to your marketing budget but you should resist because marketing will be more important than ever.”
Above all, stay in contact with your bank manager, and keep him or her informed of what is going on. “There is nothing worse for your credibility than ringing up in a panic for an emergency rise in your overdraft. Nobody likes surprises.”
To help small firms become recession-proof, the NFEA is holding a Credit Crunch Week next week to advise them on how to prepare for a downturn. It will include events, seminars, and one-to-one advice sessions. For further information go to nfea.com.
Jim Surguy, senior partner at Harvest Consulting, said the most important way to make your business recession-proof was to look after your cash flow.
“Most businesses struggle in recessions because people take longer to pay bills – so your debtor list goes up and the bank won’t lend you any money. Managing the cash becomes the single most crucial issue,” he said.
“Make sure that when you take on new customers they are creditworthy and credit-checked and that you invoice out promptly and collect your debts quickly. If you look like you are running out of cash then factor your debts because you need to keep the cash coming in.”
You should also look at ways of reducing the amount of stock you are holding, said Surguy. “If you are a builders’ merchant, for example, and the housing market is going down, you don’t want to be holding stock. You need to clear it out, even if you have to do special offers and promotions. Because stock is just cash tied up.”
However, he said there were some areas in which you should not cut back. “Small companies tend to sacrifice training and development but in fact it doesn’t pay to be short-term in those areas. Don’t let up on marketing or training and development because they are hugely important. They are investments in the future.”
Surguy said that following these rules could make a big difference to your chances of survival. “These things do make a serious difference and people who really pay attention to managing their business in a downturn will be the better for it.”
Peter Gourri of Saunders Solicitors said it was vital that all small firms reviewed their terms of engagement with customers and suppliers: “Look at when invoices should be paid, and what is the provision for payment of interest if invoices are paid late,” he said.
“We are noticing that other businesses are increasingly taking every opportunity they can to avoid payment by using any area that is ambiguous.”
Gourri said that small businesses were particularly vulnerable. “The problem is that people in small businesses are so keen to promote relationships with people that they enter into them on a handshake. That is all very well when the relationship is fine, but when there are problems you don’t have the protection of proper terms and conditions that are there to protect your business and ultimately your income. Then you find yourself in difficulties.”
He added: “As soon as you have a telephone conversation or a meeting with a potential client and agree terms, immediately send out your terms and conditions to them and confirm the agreement in writing. Anything else just isn’t good enough. This avoids any wrangling over what was agreed because it is there in black and white.”
Doing proper credit checks is essential. Gourri said: “Don’t be afraid to ask for business references if you are entering into a contract with somebody.
“Ask for bank references, and ask for money on account of disbursements, for example, expenses you are incurring, so you do not incur all of that loss upfront. And if you have a bad feeling about a potential business and the information doesn’t add up, don’t be afraid to turn it away. Business that becomes a bad debt is not business.”
Gourri said small firms should consider including a retention clause in their terms and conditions, which means that, if you provide various items of stock to a firm that then becomes insolvent, you retain title over those goods. “It means that you can go in and take back those items legitimately,” he said.
You must also chase any overdue invoices immediately. “You should be phoning them the moment the bill becomes due,” said Gourri. “You can’t allow things to slip. Keep a diary on when invoices are sent out and when you need to chase them.”
He warned: “We are already seeing that people are slowing down on payments. They are using the same tricks they used 15 years ago to drag things out.”
I'd guess that 99% of people will be spending less in 2008 than they did in 2007.Why do the government continur to argue that the economy will continue to grow?
Stephen Hulton, eure, france