Page last updated at 23:25 GMT, Tuesday, 14 October 2008 00:25 UK

How small firms can survive recession

As Small Business Week 2008 continues with a series of events to highlight the importance of the sector to the UK economy, times are now looking pretty tough for small and medium-sized enterprises (SMEs).

With it seeming increasingly likely that the UK will slide into a recession, against the backdrop of the continuing woes in the global banking sector, many of Britain's more than 4.6m SMEs face a bumpy ride.

Here small business expert Liz Barclay, a presenter on BBC Radio Four's You And Yours show, offers her advice for how SMEs can best beat any downturn.

Back in March the Federation of Small Businesses (FSB) reported that there was little sign of the economic downturn hitting order books.

Woman holding pound coins
The more savvy small firms can prosper in a recession

The FSB said the number of new start-ups was up, that manufacturing was seeing a bit of a renaissance, and there was no trickle down effect from the Credit Crunch.

What a difference six months makes.

At the beginning of September the head of SME analysis at Barclays predicted that there would be 150,000 fewer SME's in England and Wales by early 2010.

He said the drop would be caused by both more firms failing, and fewer start-ups.

And now - in the middle of October - those figures look optimistic.

So how do you make sure your business survives a downturn that looks like being both deeper and more protracted than anyone imagined?

Tougher times

Even in the good times, around a third of SMEs close after two to three years, and that number is likely to go up substantially.

It's getting harder to raise money because house prices are falling and the banks are reluctant to lend.

If you do get behind with your payments, lenders are becoming more likely to pursue you, and big firms are squeezing their smaller suppliers - demanding price cuts and paying invoices later.

Paul Mullins who runs Business Debtline, which advises small business owners on how to deal with their debts, says the number of calls his staff is dealing with has doubled in the first six months of 2008.

Mr Mullins adds that the number on the edge of failure is 50% up on this time last year.

But Alistair Tait of business support consultancy Tait Enterprises Development says enterprise is more important than ever in an economic downturn.

He says now is not the time to sit tight and hope to survive the raging storm, it's time to improve performance and put yourself in a position to get ahead once the tide changes.

Below is a checklist for how small firms can best survive any recession:

  • Don't panic. Go through your finances checking what you have to pay out, what your order book looks like, and what you're owed. Get the facts before you worry
  • Work out where you can make savings. This could be staffing levels. No one likes to make people redundant, but some firms tend to over hire in the good times. Could you hire people as you need them on short-term contracts? Rationalise your stock, renegotiate your contracts with your suppliers, hire better people at lower costs
  • Are you spending on things that don't make a real difference - travelling to meetings instead of phoning or using video conferencing, using expensive business premises when you could work from home? Sadly the Christmas parties may have to go, but make sure your staff know you appreciate them
  • You can save money with energy efficiency measures and reusing and recycling. Replace your fleet of cars with bicycles if possible
  • Maximise your productivity. You need to sell product to customers. Do do this, spend more time with your customers finding out what they need, and what will keep them coming back to you. Work on ways to sell more to existing customers. How will you get the biggest return for time spent? Remember it is cheaper to keep existing customers than to find new ones
  • Know who your competitors are and what they're up to. In the downturn more people become unemployed and some will set up businesses. You can find more people doing what you're doing and chasing less demand. Having a competitive advantage is even more important in recession than in a boom. Compete on service and quality
  • Cutting prices isn't the only way to increase demand. Can you make your product more attractive without a lot of extra cost? Could you deliver? Delivering to local customers on your way home would cost you no extra but would add value. Or if you already deliver could you be more flexible - deliver when your competitors won't. Could you attract customers with special offers?
  • Don't forget that not everyone will spend less and those who do may cut back on other products and buy yours instead. We may eat out less but buy more treats to eat at home.
  • If you're lucky enough to be able to invest, get ahead of the game for the upturn. Can you buy new stores or premises? Revamp the ones you have? Recruit talented people others have let go? Invest in better services maybe even with more staff? Reduce the odds of sales going down and lead the recovery.
  • You do have to make sure you get paid on time or your cash flow will suffer - but the reason that's not at the top of this list is that sometimes people put so much effort into this that they don't do any of the rest.
  • Is there as much money in the bank as there should be? Make sure you have a good financial control system and controller who chases up invoices, makes sure they're paid on time and closes orders to non-payers.
  • Stop using expensive advisers and use the free services available, such as the Health and Safety Executive, the Federation of Small Business if you are a member; the government's small business service - Business Links.

To ask Liz Barclay a small business question, use the e-mail form below.

Alternatively, you can email another member of our small business and entrepreneurship panel of experts by clicking on one of the links on the right.

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