Business takes action to cut costs and maintain cash flow

UK businesses are taking action to cut costs and preserve cashflow as the fear of a serious downturn takes hold, according to a survey of 500 small and medium-sized businesses by chartered accountants and business advisers MacIntyre Hudson. 

The research found that 84 per cent believe that there has been a significant deterioration in the overall economic climate for businesses in the last 12 months.

Over half (55 per cent) report that trading conditions in their own business have become more difficult since last year, while 83 per cent are anxious as to how business conditions will develop over the next year.  
In the face of these fears, businesses are already taking action, focussing on controlling and where possible reducing costs, and maintaining cashflow within the business.

Three quarters (75 per cent) are imposing stricter control of operational expenditure, while 44 per cent have reduced their capital expenditure. 30 per cent are already reducing the number of staff they employ.

The importance of cashflow has also been recognised, with 47 per cent tightening credit control for existing customers and 44 per cent conducting stricter credit assessments for new clients.
Atul Kariya, Principal at MacIntyre Hudson, comments:

“In the current economic climate, prudent action to control costs and maximise cashflow is essential. The UK economy has enjoyed a long economic cycle with 15 years of economic growth, during which most businesses found that increasing revenues was a natural consequence of a generally buoyant economy.

“However in today’s more difficult climate, tight control of cost and a focus on cashflow have become of paramount importance as the sales growth may simply not be there anymore.
“Our survey shows that almost a third of companies are already, at this stage of the cycle, reducing their headcount. In today’s service economy, labour is the biggest cost in many businesses. While costs must be kept under control, it is important to avoid downsizing in such a panic that the ability to deliver is compromised.

“Those businesses which can most effectively manage this delicate balancing act will be best placed when the upturn eventually comes.”  

While the research found a majority of businesses are experiencing the downturn directly, a substantially larger majority are more generally concerned about economic prospects, with 78 per cent stating that media coverage of the downturn and the worsening outlook for the economy has influenced their expectations.  
Andrew Burnham, Principal at MacIntyre Hudson, comments:

“Despite the high level of anxiety amongst the business community, 26 per cent say their business is doing better than last year, and a further 19 per cent say trading is much the same.  And yet many of them are taking protective measures even though they have yet to experience any downturn themselves. 

“For them, fear is the driving force. This response is both rational and sensible, but illustrates the problem for policy-makers in re-establishing the business confidence and spending required for economic growth to resume.”

The research found that businesses with borrowings are feeling most exposed to the downturn, with 89 per cent of them reporting a significant deterioration in business conditions and 63 per cent stating that trading in their own business has become more difficult.

63 per cent of indebted businesses have found both that the interest rate at which banks will lend to them has increased in the last six months, and that the terms of lending have become stricter. 

They are also cutting costs at a greater rate than firms without debt, with 81 per cent imposing stricter expenditure controls and 40 per cent reducing headcount. 
Atul Kariya, Principal at MacIntyre Hudson, comments:

“As a result of the credit crunch, bank finance has become both more expensive and harder to obtain. Any business with high gearing is heavily exposed to a downturn in trading. With bank lending requirements becoming more onerous, this is most likely to affect fledgling and expanding firms already operating in a tough market.”
Unfortunately for Britain’s entrepreneurs, the downturn has not enabled them to improve their work-life balance.

Some 33 per cent have found themselves working longer hours, even though 43 per cent already work over 50 hours each week.

Only 15 per cent of owner managers expect that their working hours will reduce if the downturn persists. 
Working longer hours in the downturn is not, however, leading to increased personal financial reward for business owners. Over a quarter (27 per cent) expect their personal drawings to decrease in the next year.

For most, preserving the financial well-being of their business has become the first priority, with 85 per cent reporting that they plan to be very cautious about drawing money out of their business, given current economic conditions.

A significant number will be working not only harder but longer, with 28 per cent stating that the downturn will delay their exit or retirement by up to five years.

However the lure of being your own boss is such that only 13 per cent wish that they could have exited sooner. 
Andrew Burnham, Principal at MacIntyre Hudson, comments:

“While those working in privately owned businesses are anxious about the market downturn, it is not all doom and gloom. The majority of those surveyed have not changed their plans for their exit from the business or their retirement date. And over half (55 per cent) expect their personal drawings from the business to remain the same, not decrease, over the next year.

“It is also worth remembering that although many businesses are starting to suffer, there are also always firms that thrive in an economic downturn.”

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