How to recession proof your business

I started Essential in 2002. Like many new business owners, I’d never run a business before.

I started by focusing on the skills and experience that I had and the niche I had been working in. That seemed to work. Our reputation and credibility grew and we started to get a steady stream of referrals, many of which we closed as the clients weren’t even talking to other agencies. We had become known as the ‘go-to’ agency for our niche, which at the time was the rugged mobile computing and data capture technology channel.

Working in the Tech Channel

A lot of our revenue came from technology resellers who were able to obtain joint marketing funds, also known as marketing development funds (MDF) or co-op marketing funds. These were typically based on the revenue generated for a technology vendor (manufacturer). Vendors would usually fund 50% of the cost of the channel marketing activities their resellers wanted to do. In those days vendors were open to all sorts of creative ideas and provided generous amounts of joint marketing funding.

We also worked with a very large IT distributor and in most cases they were able to secure 100% funding from their vendors. This gave my Financial Controller (FC) and Co-Director at the time the confidence that our clients would usually have 6 months’ worth of joint marketing funds available to them. So, when the 2008 financial crisis hit, we thought we had enough time to prepare. We were wrong.

Riding the peaks and troughs

We had been growing at a fast pace and hired people left, right and centre to keep up with demand. We’d taken on new offices a few years earlier to accommodate our growing team and our overheads were really high.

When the 2008 financial crisis hit, it hit hard, and it hit fast. Marketing is often one of the first areas to be scaled back in a financial crisis and that’s exactly what happened.

Our reseller clients disappeared first. Despite all the joint marketing funding being available to resellers, we hadn’t considered that in a downturn they wouldn’t be prepared to invest 50% of the funding to maintain a pipeline of leads.

Some of our smaller clients defaulted on outstanding invoices as they struggled to keep afloat, so we clocked up our first bad debts.

Fortunately, mobile phones and airtime contracts were still booming so our telco clients didn’t decrease their marketing spend with us. Neither did our IT distributor clients as they were still benefiting from 100% funding from their vendors, most of whom were large, global technology brands.

Plunged into survival mode

Two months after the banking crisis erupted, my FC called me aside. She said we were in serious trouble, caused by our run of cancelled projects and bad debts. However, it wasn’t only due to this.

We had been so confident that business would just keep booming that we had reinvested every penny we’d made back into our new offices and new hires. We didn’t have the foresight to plan for a downturn and with no cash reserves were going to struggle to pay salaries the following month.

You suddenly go from everything’s fine to the proverbial hitting the fan. I knew I had to act fast but some of the decisions that had to be made were the hardest I have ever taken.

Taking action - fast!

My first steps involved looking at our biggest fixed costs and as you’d expect, it was salaries followed by rent/rates. With clients dropping like flies, we didn’t need the same number of staff to service our decreasing workload so it was obvious that I’d need to scale back the number of employees. It was the logical decision, but it was far from easy.

Less staff meant we wouldn’t need such a large office and downsizing would help to reduce our overhead quite considerably. We were tied into a lease and I’d never had to get out of a lease before. That was another steep learning curve to climb.

Fast forward a week and I’d started redundancy proceedings with 50% of our team; it’s hard to put into words just how difficult that was. I had executed a breakpoint in our lease, which by a stroke of luck was within a month. Had we missed this, we would have been tied into a further 3-year lease and I doubt the agency would have survived that. I was functioning in survival mode; every action was focused on ensuring the agency had a future and we could retain as many of the team as possible.

The next challenge was dealing with dilapidations, which was another thing I’d not experienced before. The landlord advised that we needed to replace all the carpet tiles as many were worn and that we needed to redecorate the office from top to bottom. This came as a surprise as the carpet tiles were stained and worn when we moved in! Fortunately, I had taken photos of our new office to show the team when we signed the lease. These photos were helpful in persuading the landlord to allow the carpet tiles to be cleaned instead of replaced, which saved us quite a bit of money. We had a working party with volunteers from the team to redecorate the office, again saving us a considerable amount of money.

Recession-proofing the future

Six weeks later we were a much smaller agency working out of a serviced office, but we were still trading, although I didn’t pay myself a salary for six months to ensure we kept afloat.

My focus from that point forward was on increasing our profitability and building cash reserves so that we were better prepared next time a crisis hit, because it will hit, history has taught me that. Whether the 2008 banking crash or Brexit, externalities outside of your control will impact your business. You cannot control outside factors, only your response to them. We now always have six months’ worth of overheads in a savings account. This safety net gave me the confidence to reassure the team that we were in a strong position when the 2020 pandemic hit. And now, as we teeter on the verge of another recession, I feel far more confident about our future than I did in 2008.

Cash buys you critical time

Having those cash reserves gives you time. Time to plan. Time to look at the challenges your clients are facing. Time to come up with new revenue-generating services to address your clients’ new challenges. And time to keep trading when your competitors struggle as they didn’t have the foresight to build the cash reserves to see them through a financial crisis. This time around I fear the number of casualties will be higher as many businesses have Covid loans to repay and are already struggling as a result of decreased revenue during the pandemic.

Tips to help you prepare for a recession

For anyone running a business that hasn’t been through a recession before, here are my recommendations to recession-proof your business:

1. Always keep a minimum of six months’ worth of overhead costs in the bank, ideally in a separate savings account.

2. Keep a close eye on the numbers at all times with budgets, sales forecasts, cashflow forecasts, debtors and P&L. Track trends as a small change can be seen as insignificant but if it’s happening regularly over a few months then it could be more significant than you initially thought.

3. Ask your clients to sign up to a retainer with a notice period. This helps to give you time to find new work for the team allocated to that client, if that client idecides to terminate their retainer. Use this time to win a new client or see if you can expand an existing account. 
   
   
4. Do credit checks on your customers before agreeing payment terms and then continue to do these regularly afterwards. We use a credit checking service that sends updates every time one of our clients has a financial change. It also advises us of the recommended credit limit we should set for that client based on the most recent change. If the client looks risky put them on proforma invoicing and explain this is due to their credit check. Most will find this to be fair and reasonable. If they don’t then question whether you really want to risk working with them.

5. Get purchase orders for work based on an agreed scope of work. Send statements before invoices are due and chase up overdue invoices straight away. Don’t be afraid to put a client on stop if they owe money. You are protecting your business from further risk and often the threat of stopping activity will be enough to get your invoice paid.

6. Make sure you have break points in your office lease and build them into your business plan. Set calendar reminders of these dates.

7. Take pictures before you move into a new office and get the dilapidations terms in your lease limited to returning the office to the condition it was in when you took over the lease, not back to brand new if it wasn’t.
   
   
8. Stay close to your clients and have regular calls with them to ask them how they are doing. Be a good listener. They’ll often open up about their work concerns and challenges, some of which you may be able to solve and can provide additional opportunities for your business. Win-win for both parties. Clients may also share any concerns about the financial health of the business which can give you advance warning that they might be about to terminate their retainer with you, giving you time to try to replace their revenue.

9. Keep your team regularly updated on the business position. They’ll be nervous as many won’t have been through a recession or may have been made redundant in the 2008 crash. Reassure them that the business is doing well, assuming all is on track. Communicate the business plan and give them the opportunity to ask questions, voice their opinion and raise any concerns. If business isn’t going well you can be sure that they’ll already suspect this so communicate the strategy to get back on track and involve them with the plan. People can surprise you, I have seen first-hand how strongly a team can come together in times of challenge if they have a good leader to follow.

More information

Channel Marketing: more on how we understand the channel and have developed campaigns and incentives that have helped our clients to achieve their goals.

Channel Incentives: more on our end-to-end incentive management.

Buzz Days: hybrid sales call-out days designed to build pipeline, bring teams together, generate momentum, achieve results, and have fun.