History tells us that one of the most difficult periods for businesses to negotiate is as the economy emerges from recession. Previous recessions have demonstrated that as the economy begins to grow then the number of businesses going into an insolvency procedure spikes as businesses ‘over trade’ and do not have the cash resources to fund the up-turn. The time lag between the receipt of funds from increased turnover and the need to fund the cost of increased production to service the turnover often imposes a critical strain on cash available.
My view is that the strain on cash as we emerge from this recession is likely to be exacerbated by the need to have funds available for capital investment as well as working capital. Many businesses have not been in a position to replace old and inefficient plant and equipment or vehicle fleets, or invest in new technology or infrastructure. In order to take full advantage of improving economic conditions investment is going to be required as continuing to try and get by with outdated plant or machinery that is constantly breaking down or in need of repair is clearly going to increase costs.
Of course the need for investment presents it’s own challenges. Can we get the required funding from the Bank? What other financing arrangements are available? Do the likely returns justify the investment?
And then we need to consider the impact of future interest rate rises which are now visible on the horizon rather than being a ‘we don’t need to worry about that yet’ problem. Many businesses have been able to survive throughout the recession due to interest rates being at historic lows combined with low asset values meaning there hasn’t been any push by lenders towards insolvency. Businesses and individuals have become accustomed to low interest rates and low mortgage repayments. When the interest rate rise hits us we will have to be prepared for an increase in the costs to businesses and a reduction in household disposable income which could by itself lead to an increase in both corporate and personal insolvency.
But we know about all of the potential challenges and threats that lie ahead so the key to safeguarding against them is planning. All businesses should have a plan and financial forecasts factoring in such things as expansion, new investment and any associated increase in costs. Clearly some businesses will require and be able to produce more sophisticated plans and forecasts than others but such information is essential to provide management or business owners of any size with a tool to manage business growth, identify funding requirements and fundamentally to ensure that over trading does not lead to the demise of the business.