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The Economic Downturn and the Falling Pound – How Can Businesses Cope?

The British economy continues to slow down and the pound keeps falling against the euro and the dollar. Businesses must employ strategies that will help them to survive the tough times ahead during 2009.

The recession bites
Businesses are feeling the squeeze on prices. The headline Retail Prices Index (RPI) measure of inflation fell to 0.9% in Jan ‘09 from Nov ‘08’s 3% rate, the biggest fall in 28 years. The Consumer Prices Index (CPI) has fallen to 3.1% from 4.1% last year. Many economists now believe that the UK is facing a deflation by late 2009. With interest rates as low as 1.5% and inflation dropping sharply, deflation becomes a potential problem as whatever measures are put in place to stimulate spending, consumers may not make any purchases if they believe that prices will be lower in the future. This causes cash flow problem for companies that still need to pay their overhead costs. As a result of the falling pound, UK imports such as food and manufactured goods are becoming more expensive and as selling prices are dropping due to decreased demand, businesses need to make significant changes, for instance staff reductions, to their operations.

For many UK businesses 2009 will be about survival. Here are a few tips that may help your organisation stay alive.

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Secure your cash flows
Focus on your customer and supplier payments to maintain a positive cash situation. Banks may withdraw overdraft facilities very quickly and so re-negotiating you suppliers’ credit terms could provide the necessary lifeline. Reduce selling on credit and thoroughly check the creditworthiness of your customers. Remember, customers are likely to be in a similar situation and profits are worthless unless you have the cash to finance the business.

Although the lending from high street banks has been radically reduced there are organisations that will still lend money. The Essex County Council is forming a bank, The Bank of Essex, to help small businesses to grow. A similar concept is being pioneered by Birmingham City Council which will make higher risk loans to entrepreneurs to boost local employment.

Process streamlining
Understand the balance between the workload and staff numbers. Forecast and reforecast your future demand to allow you to adjust your workforce numbers to match the required output.

Encourage your staff to find ways of cutting costs. These initiatives could range from finding a cheaper electricity supplier to process re-engineering together with a new performance management framework. Look at what activities most impact your bottom line and attack these first to save time and money.

Switch currency
According to monetary predictions the pound will fall below the euro in the coming months as a result of weaker economic output and low interest rates. Businesses with international trade can start invoicing in dollars or euros especially where payment terms stretch over 30 days. Money received should be maintained in these currencies and so reduce the immediate impact of the falling pound.

Focus on the public sector and customer service
The UK government is bringing forward projects which were not planned to start for another 2–3 years. The wider public sector, which includes local authorities, is spending billions of pounds to boost local employment. Your business should investigate these initiatives and if possible dedicate resources to gain a slice of the cake.

In tough times the price of your product is very sensitive and it is the service you give that distinguishes your product from others. Customers will be looking for cheaper options. However, good customer service will increase their switching costs and lock your customers in.

Do not cut back on investment for the future
Companies may be tempted to cut back on investment for such as updating systems, training or assets that will bring long term cost reductions or increased competitive advantages. This is the right time to invest as asset costs are significantly lower than in growth times. There are opportunities to be found by hiring skilled personnel for less as many become available due to the downturn.

Finally, firms should seek support from three key stakeholders; the Bank Manager, the Accountant, and the Customer. Together they can help a business secure the required investment, become focused on cash management and deliver good customer service in order to win orders.