What scale-ups need to focus on now to ensure they not only survive but continue to thrive.
Every headline I read at the moment paints a very bleak picture of the UK economy and the recession that, this week, the Chancellor confirmed we are in. Having just weathered a pandemic, companies are now faced with an even tougher challenge. Corporate insolvencies in England and Wales are at their highest level since 2009 with soaring energy prices and inflation being blamed. The first sectors to be hit hardest were construction, manufacturing, retail, food and accommodation but all companies are feeling the strain.
So what can start-ups and scale-ups do now to make sure they weather this particular storm?
I was delighted to join Alice Stephenson, Founder of Stephenson Law and Scott Edinger, Founder of Edinger Consulting to discuss the potential strategies available to scaling companies. In case you missed it, you can access a link to the recording here or read on for my top five areas to focus on now.
The key message is that Founders need to be responsive, agile and obsessively focused on cash flow.
Most of us are able to remember the last global recession of 2008/09 and there are some clear pointers that we can take on board now to ensure we not only survive the downturn but thrive on the other side.
Research conducted by Bain and Company shows that there is much to be gained in terms of business growth and competitive advantage by getting your strategy right both before and during a recession. In fact their research shows that the winners from the last recession recorded 17% higher growth than their competitors immediately after the recession and that gap only widened thereafter.
winners from the last recession recorded 17% higher growth than their competitors immediately after the recession
Whilst consultants may not agree entirely on what constitutes a winning strategy, there is consensus that Founders need to have a thorough understanding of their cost base, the opportunities for growth and to invest in the right areas to achieve this growth. Those who act swiftly and before their competitors usually succeed. Let’s take a look at our five point plan for Founders:
1. Understand your customer base
As in the last recession, all sectors and all sizes of company will be impacted by the economic downturn. Having an understanding of the pressures that your customers are facing is critical if you are to understand how secure your revenues and sales pipeline are. Is your product or service a nice to have or a need to have? How does this impact your pricing strategy, churn rate and conversion metrics? Will you be able to pass on any cost increases to your customers?
Sales growth comes from three main areas - selling more of the same; selling more of the same to someone new; or selling something new entirely. By diversifying your revenue streams you can reduce the reliance on your current customer base and provide much needed security during a downturn. Consider new use cases for your current products or services, this can open up new markets with little additional costs.
2. Understand your cost base
All companies look to reduce costs during a recession, this is often a necessity as cost cutting measures are usually swift and the results appear in the bank almost instantly. However, winning companies demonstrate a strong understanding of their cost base and look to reduce unnecessary costs or processes from the business to achieve savings, make the business more profitable but also retain agility to leverage opportunities for growth.
Review your costs on a line by line basis to identify those that are variable or fixed, those that are necessary versus the nice to haves, review contract terms to understand how the cost base may change over time and always review the return on investment to assess whether this indicates a good investment.
When cutting costs, always consider the value you provide to your customers and never cut in areas where you would erode the quality of the product or service, the customer experience or the sales experience. This will only ever have a bad outcome.
3. Get the basics right
By that I mean focus on your working capital cycle so you free up cash within the business to invest in growth. Increase your efforts to get cash in from your customers on time, negotiate extended terms with your suppliers and forecast your cash flow requirements weekly or even daily where required. If you maintain an obsessive focus on cash you will see immediate improvements in your ability to invest in your business.
Most Founders are focused solely on revenue growth or profitability and so they rarely look at the Balance Sheet. However, every business has cash tied up in the Balance Sheet so reviewing your working capital cycle is always a quick win.
4. Extend your cash runway
Easier said than done! However, raising finance in a downturn is always tough and we are already seeing good companies getting either a bad offer or no offer at all. Investors expect Founders to be managing their runway beyond six to nine months.
Look at strategies to extend your cash runway and if you need to raise finance then go out to the market early as it will undoubtedly take longer, be more expensive and there will be increased due diligence.
Consider other sources of funding. For instance, have you applied for innovation grants or research and development tax credits to help fund investment?
As I said in a previous blog cash is king, even more so now when times are tough.
5. Plan for growth
Forecasting, scenario planning and stress testing is always key to business success. Start with your business strategy, set out where you want the business to be in three years time and understand what good looks like. Set out your plan to get there, who your key team members are and what you need to succeed.
Then stress test your forecast. Model the impact of different scenarios on your P&L, Balance Sheet and cash flows. Only by modelling what might happen can Founders be well placed to react to emerging opportunities.
A business with a clear vision for the future that is lean, agile and responsive to change will survive and thrive in any economic climate.
Get in touch with Emily@growthbuilders.io today to discuss how GrowthBuilders can help.
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