EP Magazine

Coming out of the recession

Jonathan Perrin, Head of Vantis’ Hospitality & Leisure Group explains why you should act now to make the most of the upswing

THE UK IS TECHNICALLY OUT OF recession, but most businesses feel they are still in an economic downturn. According to most reports we do not expect to see an upturn until later this year or even well into 2011.

It is important that you start thinking now about a plan to ensure that you don’t succumb to the traditional pattern of post downturn financial disaster. In my opinion the dangerous time for businesses that have survived a downturn is coping with the upswing.

In a manufacturing environment, companies need to stock up. That involves additional finance to ensure they don’t fall foul of ‘over trading’ – having insufficient capital to finance the manufacture of the product they are selling. In the hospitality sector, the problem of outstanding debtors owing money to the business is not nearly the same problem as faced by most other businesses. However, in this sector, businesses will gear up by taking on more staff to be able to cope with the anticipated upturn in custom and one of your key ratios – staff costs – will go above the established acceptable limits.

Now is the time to ensure your relationship with your bankers is kept in good order. You need to be able to supply them with timely and accurate management information and share with them any changes in your actual numbers compared to forecasts. Banks hate surprises and tend to react rather badly to them. Every business I have ever dealt with has blamed the difference on their actual numbers to their forecast numbers on ‘one-offs’. We all know that these occur and they need to be explained fully and understood by both management and lenders to the business.

There is an old familiar saying “if you owe the banks money you need to worry, if you owe the banks a lot of money, it’s the banks that need to worry!” At the moment the banks are ‘locked in’ to a lot of companies, as the assets that they are lending against are worth less than the loans that have been lent against them. This is an assumption based on how much valuers  reckon the market has fallen. I’m not sure there are many actual examples one can point to, as nobody wants to recognise this fact by having a formal valuation. A difficult thing to do at the best of times, when the difference between buyers and sellers was about 20% and now according to a recent survey can be up to 300%!

But what happens in an upturn when asset values start to improve? Will the banks then take the opportunity of asking for their  loans back in the knowledge that they are again covered by the value of the asset in question? My advice is that one can protect oneself against this happening by convincing the bank that the right management is in place and that their loan is  secure, funding a well run business.

In essence the skills needed to drive your business through the downturn and the upturn are essentially the same. Know your   customers, create good relationships with all your stakeholders and ensure you don’t take your eye off the ball. There is much  debate as to who are the most important people to your business. Is it the staff, customers, suppliers, or the sometimes  forgotten investors /lenders? The answer is almost certainly not only one, but a balance between them all.

You need to plan for the months ahead and think about those areas in the business that will change and come more into focus when trading improves. At this point I can’t resist trotting out that lovely management speak line “fail to plan and you’ll plan to fail”!