Downturn changes management priorities

2008

More than eight out of 10 small to medium-sized British businesses say they have seen a significant deterioration in their economic climate in the past 12 months, meaning that maintaining cashflow and curbing costs have become the two key priorities for managers at all levels.

The poll of 500 firms by chartered accountants and business advisers MacIntyre Hudson found more reporting much tougher trading conditions than at the same point last year, with more than eight out of 10 severely worried about how things will unfold over the next 12 months.

As a result, three quarters said they were now imposing stricter control of operational expenditure, while four out of 10 had reduced their capital expenditure.

Nearly a third were already reducing the number of staff they employ, while nearly half were tightening credit control for existing customers and 44 per cent were conducting stricter credit assessments for new clients.

"In the current economic climate, prudent action to control costs and maximise cashflow is essential," said Atul Kariya, principal at MacIntyre Hudson.

"The UK economy has enjoyed a long economic cycle with 15 years of economic growth, during which most businesses found that increasing revenues was a natural consequence of a generally buoyant economy.

"However in today's more difficult climate, tight control of cost and a focus on cashflow have become of paramount importance as the sales growth may simply not be there anymore," he added.

But he also warned that, when it came to job cuts, it was important not to be too hasty.

"In today's service economy, labour is the biggest cost in many businesses. While costs must be kept under control, it is important to avoid downsizing in such a panic that the ability to deliver is compromised," he emphasised.

"Those businesses which can most effectively manage this delicate balancing act will be best placed when the upturn eventually comes," he added.

This finding echoed research last week by consultancy PricewaterhouseCoopers that it can be a mistake to start making redundancies at the first whiff of a downturn.

In fact a light-touch, more flexible approach to managing people – where job cuts are a decision of last resort – tended to be more effective when it came to riding out adverse market conditions, it argued.

Worryingly, the MacIntyre Hudson survey suggested that, while a majority of businesses were experiencing the downturn directly, a substantially larger proportion were more generally concerned about the economic climate.

Nearly eight out of 10 felt that "doom and gloom" media coverage of the downturn had influenced their expectations.

Yet more than a quarter of the firms polled were actually doing better than last year, while a further fifth said trading was unchanged on last year.

This meant the UK had to be careful not to scare-monger itself into a recession, argued MacIntyre Hudson principal Andrew Burnham.

Many firms were taking protective measures even though they had yet to experience any downturn themselves.

"For them, fear is the driving force. This response is both rational and sensible, but illustrates the problem for policy-makers in re-establishing the business confidence and spending required for economic growth to resume," said Burnham.

When it came to finance, nearly two thirds of indebted businesses had found the interest rate at which banks lent to them had increased in the past six months and that the terms of lending had become stricter.

They, perhaps unsurprisingly, were also cutting costs at a greater rate than firms without debt, with more than eight out of 10 imposing stricter expenditure controls and 40 per cent reducing headcount.

"As a result of the credit crunch, bank finance has become both more expensive and harder to obtain," said Kariya.

"Any business with high gearing is heavily exposed to a downturn in trading. With bank lending requirements becoming more onerous, this is most likely to affect fledgling and expanding firms already operating in a tough market," he added.