Tips for business recovery

Content Summary

The overriding objective for business recovery should be to position the business for sustainable growth. This requires maintaining the good practices that helped you manage the business through the tough times. You should maintain a disciplined approach to working capital management and focus on increasing profitability and increasing efficiency.

These tips provide some suggested strategies to help with business recovery.

Perform a financial health check

Understanding the financial health of your business is fundamental to deciding what should be done to accelerate its recovery.

Analyse your financial statements for data showing the financial health and performance of your business. You should be looking at key ratios, including:

  • liquidity
  • solvency
  • profitability
  • management
  • return on investment.

When these ratios are compared against past performance and competitors, this data will reveal trends and help to identify the strengths and weaknesses of your business.

Conduct a SWOT analysis

A SWOT analysis will reveal the current state of your business, its capacity to recover and what additional capacity may be needed to help it recover.

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.

A SWOT analysis may highlight weakness or threats that were not known or addressed when trading was difficult, possibly because your focus was on more significant threats. New weaknesses may emerge because of the actions taken to help the business manage through the tough times.

In analysing opportunities and threats, you should:

  • research customer tastes so you can forecast how this may change demand for your business’s products or services
  • research if your suppliers and competitors are affected by any challenges and factor that into your forecasts
  • determine the changes to make, including adding capacity, moving capacity within the business or disposing of excess capacity.

Review and rewrite the business plan

Once you have determined the financial health of your business and completed a SWOT analysis, the business plan should be reviewed and updated. This is to ensure it reflects the current capacity, growth opportunities, changes in strategic direction and any remaining uncertainties.

Important areas to consider in your business plan include:

  • how to expand capacity. For example, recommissioning plant or equipment, purchasing new equipment, establishing new premises, hiring new staff
  • the likely cost of any expansion plans, both in capital and ongoing expenditure
  • how to pay for any expansion plans.

Focus on innovation and efficiency

When times are tough, business strategies are likely to focus on maximising efficiency. But when a business is in recovery mode it's more appropriate to become more innovative while maintaining a focus on efficiency.

Businesses trying to balance efficiency and innovation should seek to inspire innovative behaviour while retaining short-term productivity. Conduct pre-launch project reviews to ensure your limited resources are focused on the most promising innovations.

Take advantage of opportunities

Businesses that are in a strong financial position after a tough time should consider opportunities to expand. For example, consider acquiring competitors, opening in new locations or seeking capital investment. As tough times may affect the entire economy, these opportunities could be more favourable during tough times as asset prices may be depressed.

Review and revise your marketing plan

Your marketing plan should recognise that limited resources may continue to be a constraint. Any additional resources in the business may be focussed on increasing capacity to meet higher demand. The marketing plan should focus on helping the business improve its cash position and 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 quickly increase cash flow
  • reward employees for sales of higher margin products and when payment is received
  • avoid discounting, unless it achieves a higher gross profit margin through increased volume
  • measure the success of each promotional activity or campaign
  • encourage customers to pay at the point of purchase or too early.

Remain focused on improving your cash position

During tough trading situations, many businesses focus on improving their cash position. Often this involves improving working capital management, such as reducing stock levels, increasing the percentage of cash sales and reducing payment terms for debtors. Maintaining this focus should continue to add to the business’s cash reserves. These could be an important and easily accessed source of finance to help fund your plan for business recovery.

Improve profitability

When times are tough, many businesses focus on improving their cash position. This may have included significant discount to encourage cash or early payments. During recovery, such discounts and incentives should be removed so your business can focus on improving profitability.

Another benefit of focusing on profitability is that it increases the retained earnings of your business, creating another internal source of finance.

Consider your funding options

Some businesses may have found it difficult to secure external finance during a downturn. But during recovery, you should not limit yourself to solely using internal sources of finance. Consider returning to your bank for finance if funding is needed for recovery.

When considering a bank loan, your business should:

  • define how much and how long the funds will be required
  • be realistic about how much the business can afford to borrow
  • determine how much of security the business can offer
  • start early to allow enough time to compare offers from various banks
  • consider using multiple lenders to spread risk, depending on the amount of financing required.

Address business weaknesses

The actions needed to survive tough times may have negative impacts that should be addressed during recovery. The following activities may need to be taken during recovery:

  • Increase stock: Some businesses may have run down their inventories to improve their cash position. In such cases, they will need to invest in new inventory during recovery. For a manufacturer, this could mean increasing inventory by hiring new employees, recommissioning mothballed equipment or even buying new plant. These measures will tie up cash in inventory, so the business must be able to justify any investment in inventory with market research and forecasts.
  • Reduce debt from external sources: Business may have taken short-term financing at high interest rates to remain viable. Excess cash or new debt at a lower interest rate and more favorable terms should be used to pay off such debt.
  • Broaden the sales focus: Businesses may have focused on products or services that convert to cash quickly. This may resulted in a run-down range of product or services, or innovation being stifled. The business may need to broaden its offerings to help with recovery.
  • Don't focus excessively on costs: Businesses can often be overly aggressive in cutting costs during tough times and will need to reverse some of those measures to begin recovery.
  • Revisit staff arrangements: Businesses may have reduced staff, working hours, or introduced a recruitment freeze during tough times. If research shows demand for your products or services is likely to increase, you may need to recruit new employees.
  • Beware of a false recovery: It’s possible that challenging conditions continue for longer than you expect, even if you’re feeling confident. Include a scenario of continued challenges in all forecasting.