The UK Government set out its mini budget on Friday 23 September with economic growth its main focus. And given growth for July 2022, standing at just 0.2%, and a contraction in the third quarter, that focus is entirely understandable.
They say a week is a long time in politics, and certainly the last few weeks have shown that. The immediate market reactions to the mini budget were dramatic, and depressing, and irrespective of the reversal of the abolition of the 45% tax band or any further U-turns to come, there is little to smile about in the economic outlook.
Businesses are well-used to embracing uncertainty and change. Brexit and the global pandemic have proven businesses to be resilient and more than capable of reinventing themselves. That same footing will be needed to navigate the present and short to medium term. A constant stream of announcements, reversals and new announcements does not give a confident feeling of stability.
So what should businesses do to prepare?
Budgeting and forecasting
Looking into the future is always difficult and it’s never accurate. However, having an idea of what you expect to happen is the best possible protection against what may go wrong. It helps you to spot problems early and find solutions. Above all, if the economic winds get strong, your budgets provide the security and knowledge that can be key. If the current gloom is misplaced, your budgets provide the building blocks for growth and success.
We all know that energy costs have risen to levels that just six months ago would have been considered inconceivable. The Government’s announced support is very welcome, but the pricing will be capped at the high levels already being suffered, the crisis in Ukraine shows no sign of calming, and we all know that energy support cannot be indefinite, so the hike in these costs is not going to fall in the short term.
Businesses may consider energy costs a short-term event and look to ride that wave. Others may see this as a new norm and that they need to rework their models or seek energy-saving processes. Either will eat into reserves that may already be reduced following the Covid pandemic, until demand and pricing adjust to higher costs. Rising wage costs will also take time to settle, and since these costs affect every business which will in turn seek to increase its own pricing, we can expect that all costs will increase until the demand cycle adjusts itself.
The question to ask is what impact will high energy and other costs have on the business’s ability to operate? What will happen if those energy prices continue to rise? What impact will the resulting cost-of-living crisis have on wages? Can these costs be mitigated by price increases? And what impact will this have on customer-demand, cash flow and profitability? For some businesses, it will be a case of survival rather than growth, protecting the business for growth in (hopefully) 12 or 18 months’ time.
This type of scenario planning is not always easy, and some business owners may consider it a waste of their time. Yet meaningful decisions cannot be made without knowing the financial parameters in which a business operates. Now, more so than ever, is it true that knowledge is power.
Focus on the core business
For most businesses, there will be a core or heart that provides the day-to-day cash that keeps the business thriving. Now is the time to focus on that activity. Look to the products and services that customers view as essential and focus on them. Remember that customers’ discretionary spend may quickly disappear and with it, revenue. For some, that may mean holding off on expansion plans into new or related areas that whilst may deliver greater growth will divert time, cash and the efforts of key staff. For others, it may in fact mean focusing on growth areas.
It’s also important to understand your product mix and where the profits lie. It’s tempting to focus only on the higher margin lines. However, lower-margin products may more easily produce the cash flow needed to keep the business heart pumping.
Keep up marketing activity
Businesses may be tempted to slash or pull marketing budgets entirely. Don’t. Focus on activity that drives sales on the core products and services the business provides. Sales-focused marketing is one of the foundations on which to sustain and then build a business.
Staffing – don’t lose key staff
Economic downturns are typically followed by redundancy rounds, yet the employment market today is very different to previous economic cycles. Employment levels are high, and businesses are struggling to recruit. The temptation of cost-cutting is strong if profits fall away, yet it is often self-defeating. It signals trouble, and that in turn sends a message to the staff you want to keep that they should find safer ground, or it encourages them to take chances with a change of career.
Where redundancies must be made – and they should be only as a last resort – they should be made fairly and properly, sensitively and selectively. Remaining staff should not be alienated – they may choose to vote with their feet. Above all, they should be made legally! Take advice, but remember that for most businesses in the UK, their skilled and experienced staff are their most valuable asset – and one which does not appear on any balance sheet.
Businesses may learn from the aviation industry which was quick to let staff go in the depths of the pandemic but has since struggled to recruit when the market once again picked up. Down-turns eventually reverse to growth, inevitably, and it may be better to keep your staff and suffer reduced short-term profitability than to be unable to grow when the time comes. Once again, this is about budgeting, because it is equally better to lose staff and to survive to re-employ them, than to fail.
The message must be to budget, forecast and to discuss the options with key people in your business.
Don’t borrow to survive
Borrowing in a downturn is a risky business. It is often harder to secure and will inevitably require personal security. It can also be expensive, even more so if interest rates continue to rise as predicted. Banks also have had a historic tendency to ‘call in’ borrowing at short notice with little or no good reason, particularly if the business relies on a bank overdraft. Borrowing on fixed-term repayment loans offers a greater degree of security as they can only be called in if loan terms are breached.
Beware too of banking covenants. If a bank takes security, it may well set a loan-to-value limit on the security. If that security is a home, as is often the case, that covenant could inadvertently be broken should property values fall.
If the business must borrow, do so before it is in trouble. If you have a CBILS loan, it is typically repayable over 6 years, but the rules allow for it to be extended to 10 years. This may ease cash flow and you may wish to discuss this with your lender – but remember, they may impose charges or higher interest rates in return for extending. Remember that your suppliers face the same problems, so try not to extend supplier payments, as it only has a very short term benefit to you and massive detriment to your suppliers. To return to my first point, use forecasts to predict pinch points and to determine potential borrowing requirements and apply before it is needed.
A word about tax in the mini-budget
Tax is important, but only when you have some tax to pay. Your advisers may be able to help you mitigate the cost of tax, which can have a big impact on cash flow, so keep talking to them. But be aware that currently the tax landscape is as changeable as the wind. The political blustering, and indeed blundering, is interesting but that is about politics and public finances. The reduction in NIC’s will be welcome by all, and will offer an immediate reduction in the cost of employment, but will have little impact on the lower paid section of the workforce. These people are often an invisible backbone of a business, or more junior staff who will later become key players. Nurturing them now as they struggle, can pay dividends in the future. Literally.
How we can help
If you would like to discuss any of the points above, please speak to your usual Hillier Hopkins adviser. If you are not currently a client of Hillier Hopkins, we offer a free consultation where we aim to understand your business and goals and provide options on how we can help.