Winter is Coming for Your Business. Are You Prepared?

In this article, I will explain the term ‘economic winter’, cover how it can affect your business and how you can best prepare.

 Firstly, to illustrate what I mean by the phrase ‘winter is coming’, I am going to use a seasonal farming analogy: 

Spring:

During spring, farmers sow the seeds and things start to grow.  Without seeds there can never be any crops.

Summer:

Summer is when things start to take off; their crop is nice and healthy and everything blooms. 

Autumn:

Autumn is when the crop is harvested, and farmers can reap what they have sown. 

Winter:

Winter is a bleak and nothing grows. To survive it, farmers need to have harvested enough crop in autumn to get them through the season.

An Economic Winter

Think back to 2007 and 2008, when we had The Great Financial Crisis. This was probably the worst hit to businesses that people alive today have experienced since The Great Depression.

The GFC was an economic winter and it was a global phenomenon. 

Many businesses failed and the ones that survived hung on by the skin of their teeth. 

Predicting the Next Big Freeze

In 2009, we entered a spring. We stared the road to recovery; businesses began to take off again and the economy started to improve.

That spring, however, was Ten years ago and experts today will argue that we are now, as a season, in late autumn.

If you look at the economy, business has been buoyant; a lot of companies are the best they've ever been, and markets were at their peak. Interest rates are at near lowest levels ever and because of that, people and businesses are borrowing up to their eyeballs. The problem with that, is at some stage interest rates are always going to rise. 

Autumn is the beginning of the ‘cooling off’ period and in the UK, this is already being reflected in the property market. We have seen some decreases in property valuations, which is often an early indication that we're heading towards a winter. Also with the whole debacle on who Brexit has been negotiated, both business and consumer confidence has taken a knock.

The Seasons in Business Terms 

Economic Spring:

As a business owner, when you’re out there in spring, you need a lot of capital in your 

business because this is when you're experiencing growth. 

Economic Summer:

This growth is further compounded in summer, which is when you are at your maximum expenditure. You're growing fast and are extremely busy. That growth costs a lot of money as you’ll need to hire people, buy products and invest in equipment to keep up with demand. 

Economic Autumn:

In autumn, business should be quite stable. There will be growth, but not to at the level that you will have seen in the previous seasons. Autumn is about reserving some capital and building money within the business. You need to build what I call a ‘fortress balance sheet’; a balance sheet that can survive winter. 

Economic Winter:

Many companies make a loss in an economic winter. In this season, the banks will not lend you money are easily as the other seasons. If you don't have the capital reserves behind you, it's going to kill your company.

 Interestingly, there are a lot of businesses out there that are still struggling to recover from 2009. They made it through the Great Financial Crisis but they haven’t managed to rebuild their capital reserves. They're still trying to work themselves out of a hole, which is a dangerous position to be in. What do you think will happen to those companies when the next winter comes? 

This time, they won’t survive.

Could your business survive an economic winter?

Winter does not pass overnight. 

On average, recessions tend to last anything between 12 and 18 months. 

Could your business survive that long, in the wilderness?

Tips to survive

One thing I always suggest to business owners that I work with is to keep 10% of your turnover available in liquid cash in the bank. Doing so affords you the flexibility to make sure that you are able to hire people etc and you have the cash to get you through.

The second thing I always recommend is to start looking at your balance sheet. If you needed to, could you access the cash tied up in your balance sheet today? 

So many business owners I come across put all of their profit back into their business. Investing in your business is a good thing to do, however, I've come across businesses that have as much as ￡4 million tied up in machinery and stock. 

In an economic winter, a ￡4 million balance sheet is worth nothing; if you can't access the money quickly, it’s of little use. Also, if you’re in a situation where you need to sell off stock/machinery in a hurry, a ￡4 million balance sheet will never generate ￡4 million. To put it simply, if you need cash to continue to trade and everything on your balance sheet is tied up, then you’re going out of business.  

Winter is Coming for Your Business.

Are you ready?

How many of you reading this are balance sheet rich and cash flow poor?

What do you need to do to change your liquidity?

What's your strategy going forwards to make sure that when winter comes, you are protected?

If you cannot answers these questions or find your answers to be weak you need to act now. Ignoring such a situation could see your business being buried... If you need help answering any of these questions, or if I have touched on something in this article that you would like to discuss further, head on over to boolkah.com and get in touch. 

Remember, failing to learn is learning to fail,  and failing to act is just stupid.