After you have survived the tough times, you should begin to consider preparing your business for recovery. The overriding objective for such preparation should be to position your business for sustainable growth. This requires maintaining the good practices you may have adopted to manage you through the tough times. In particular, you should maintain a disciplined approach to working capital management, focus on increasing profitability and increasing efficiency.
The following tips provide some suggested strategies to assist with business recovery.
Perform a financial health check
Knowledge of the financial health of your business is fundamental to assisting you decide what you can and should do to assist business recovery.
A significant amount of information on the financial health and performance of your business can be gained by analysing your financial statements through financial ratios. The key ratios cover:
- return on investment.
Where these ratios are compared against both past performance and similar businesses, this analysis will provide trends and help to identify the current strengths and weaknesses of your business.
Undertake a SWOT analysis
You should undertake a SWOT analysis to determine the current state of your business, what current capacity your business has to recover and what additional capacity may be needed to help your business recover.
The SWOT analysis may highlight weakness or threats that your business did not fully address in tough times (often because your focus was on more significant threats) and other weaknesses may have emerged as a consequence of actions (often necessary action) you undertook to help the business manage through the tough times, such as a running down of stock.
In analysing the opportunities and threats, you should:
- research customer tastes, so that you can forecast how this may impact on demand for the business’s products or services
- research how the tough times may be affecting your suppliers and competitors and factor that into your forecasts
- determine what changes may need to be made, including adding capacity to the business, shifting capacity within the business or disposing of excess capacity, to respond to these opportunities and threats.
Review your business plan and rewrite where appropriate
Once you have determined the financial health of your business and completed the SWOT analysis, your business should review its current business plan to ensure that it reflects the business’s capacity, the ability to grow that capacity, where you want to take your business, which may be different after tough times, and continued uncertainties that may remain.
Important areas to focus the plan on include:
- how to expand the capacity of the business. For example, recommissioning plant or equipment, purchasing new equipment, establishing new premises, taking on new employees
- how much such an expansion is likely to cost, both in capital and ongoing expenditure
- how the business is going to pay for such an expansion.
Focusing on innovation and efficiency
During tough times, a business strategy is likely to be focused on maximising efficiency. When a business is in recovery mode, it is likely that these businesses will try to become more innovative but maintain a continued focus on efficiency.
Businesses trying to balance maximising efficiency and innovation should seek to motivate innovative behaviour without jeopardising short-term efficiencies. Therefore, business should limit areas of innovation, while empowering employees to search for new opportunities. To ensure that limited resources are focused on the most promising innovations, pre-action reviews of projects should also be undertaken.
Take advantage of opportunities
Businesses that find themselves in a strong financial position after a tough time should consider opportunities to expand, for example, acquiring competitors, opening new locations or through capital investment. As tough times can and do affect the entire economy, opportunities may be more favourable during tough times as asset prices may be depressed.
Review and revise your marketing plan
Your business should consider reviewing and revising its marketing plan. Such a plan should reflect the likelihood of limited resources continuing to be a restraint on marketing activity and the possibility that any additional resources are focused on increasing the capacity of the business to meet higher demand. It is therefore important that the marketing plan is focused on assisting your business improve its cash position, profitability and promoting any new, or revived, products and services.
A marketing plan for businesses seeking to recover should:
- focus on sales that have a high margin and bring in the cash quickly
- reward employees for sales of higher margin products and when payment is received
- avoid discounting, unless it can achieve a better gross profit margin through increased sales volume
- measure the success of each promotional activity or campaign
- encourage customers to pay at the point of purchase or to pay early.
Remain focused on improving cash position
During tough times, many businesses were focused on improving their cash position by improving working capital management, such as reducing stock levels, increasing the percentage of sales for cash and decreasing the time debtors take to pay. Such a focus during the tough times may have increased cash reserves and improved profitability. Continuing that focus should add to the business’s cash reserves, which could be an important source finance that can be easily accessed to help fund your plan for business recovery.
Focus on improving profitability
During tough times, a business is most likely to have been focused on improving its cash position. However, in an effort to improve cash flow, the business may have heavily discounted to encourage customers to pay in cash or to pay their debts early. During the recovery phase such discounts and other incentives should be removed so that your business can also focus on improving profitability
Another benefit of focussing on profitability is that it builds the retained earnings of your business, creating another internal source of finance your business can access.
Consider your funding options
Even though many businesses may have found it difficult to access external finance during tough times, a business should not consider itself limited to solely using internal sources of finance during the recovery. Businesses should therefore consider going back to their bank for finance (if funding is needed for business recovery).
When considering raising finance from a bank, a business should:
- determine the usage and time the funds are going to be required
- be realistic about the amount of funds the business can afford
- determine what level of security the business can offer
- start early – to provide adequate time to compare what is required with what various banks are willing to offer the business
- depending on the amount of financing required, consider using multiple lenders to spread risk.
Address the weaknesses in your business
The actions a business may have taken to manage through tough times can have negative consequences that may need to be addressed if the business is going to recover. The following are a range of activities that may need to be undertaken to address the consequences of actions taken during tough times.
- Increase stock – the objective of stock management should be to hold an optimal level of stock. There will be businesses that have run down their inventories to below optimal levels during their tough times to improve their cash position. In such cases, businesses will need to invest in new inventory – for a manufacturer this could mean increasing inventory by putting on new employees, recommissioning "mothballed" equipment or even buying new plant. Such an exercise will mean tying up cash in inventory, so it is important that the business is able to justify through market research and forecasts any expansion in the inventory that it carries.
- Paying down debt sourced from external sources – business may have sort short term financing at high interest rates to keep their business viable during their tough times. Excess cash or new debt (if it is at a lower interest rate and comparable or longer terms) should be used to pay down such debt.
- Broaden the focus of sales – during tough times, businesses may have focused on products or services that turn into cash quickly, which may have resulted in a run-down range of product or services or the business not experimenting with new products or services. The business may therefore need to broaden their product and service range to help with their recovery.
- Don't focus excessively on costs – it is not uncommon for businesses to be overly aggressive in their cost cutting during tough times and have to reverse some of those cost cutting measures to be able to begin to recover.
- Revisit staffing arrangements – businesses may have reduced employee numbers, reduced working hours or implemented a recruitment freeze during tough times. If your research shows demand for your product or service is likely to increase, you may need to recruit new employees.
- Beware of a false recovery – it is possible that your confidence may be misplaced and that the tough times will continue. In any forecasting, you should include a scenario of the tough times continuing.