Will recovery be harder than recession for SMEs?

Sounds perverse, but a sudden pick-up in orders might actually put small firms under real pressure...

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Last Updated: 06 Nov 2012

We don’t know much here at MT, but one thing we’ve always assumed to be true is that recessions are bad and recoveries are good. However, it turns out that we may have been wrong on that one, too. According to private equity firm Octopus, some SMEs may discover that they’re actually more vulnerable in an upturn than they were in the downturn, if a big batch of new orders suddenly puts some serious pressure on their bank account. It would be pretty galling to survive the worst recession in decades, only to fall by the wayside as the economy heads into the sunlit uplands…

‘The core problem for SMEs throughout a recession is cashflow, and this is squeezed even harder in the early stages of a recovery,’ argues Chris Allner, Octopus’s head of PE. And he might well have a point. Many businesses have spent the last year running down their inventories to the lowest level possible, in a bid to save money. So when the economy starts picking up and the orders start coming in, it follows that they’ll have to splash out on fresh supplies to meet the increased demand – whether that’s extra widgets or extra staff. Since it’ll presumably be a while before they see the colour of the client’s money, it seems quite plausible that some companies could end up dangerously short of cash.

So what exactly can firms do about it? Well, first and foremost, suggests Allner, they need to get a clear handle on their cash position – something some small firms don’t do enough. That includes talking to creditors and debtors, so you can work out how to prioritise bills without alienating your suppliers. Cost-cutting efforts should continue, he adds, to try and free up some extra dosh (a reminder there why the unemployment figure is likely to keep rising). And if needs be, he says, firms should consider trying to identify an alternative source of finance, so they’re not left high and dry.

Of course, as a firm that exists to inject equity finance into small and medium-sized firms, Octopus has rather a vested interest here – presumably it’s keen to remind these companies that its services (or at least, its cash) will be even more valuable as the economy improves. Equally, having orders is presumably better than having no orders - it's a high-quality problem, as they say.

Still, the basic point seems a fair one: even if we’re technically out of recession, Britain’s SMEs are not out of the woods yet. The next year or so is going to bring a whole new set of challenges...


In today's bulletin:

John Lewis puts on a brave face as sales slump
Business face post chaos as Royal Mail strike looms
Editor's blog: Poor old Kodak's fall from grace
Burberry needs a little help from its (online) friends
Will recovery be harder than recession for SMEs?

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