A double dip of gloom
or confidence for SMEs?
So we're into a double dip recession. But what does that really mean for SMEs and could a ring of confidence help the situation? NWN's Howard Walters offers an accountant's insight.
It's official: the Treasury says the UK is back in recession. Not satisfied with a single scoop, the country is now double-dipping after crawling out of the first slump at the beginning of 2010. But let's provide some context here because, while the news is certainly gloomy, the reality is not particularly startling.
The UK definition of a recession is: two consecutive financial Quarters where Gross Domestic Product (GDP) has reduced. It doesn't have to be much and, in the case of the last Quarter of 2011 and the first Quarter of 2012, we are talking about a reduction of 0.2% and 0.3% respectively. Technically it's a recession, but as far as the Office of National Statistics is concerned, they have a margin of error of 0.2%; so we might not be in recession at all!
These small fiscal fractions add up to what most SMEs already know: times have been (and still are) tough, with little sign of improvement in the immediate future. For most businesses, nothing much has changed. Any good business owner knows from experience and gut feel when things are 'not good' economically. In reality, the UK's small businesses have been dealing with 'not good' for the past two years, so have largely not rushed to over-spend or over-trade. Looking at NWN Blue Squared's client data, it's easy to see an average reduction in profits across the board.
The construction industry, a key economic bellweather in most countries, has been particularly badly hit in the UK, with new orders down 14% last year, with the Construction Products Association forecasting significant falls again this year and a flat 2013. The National Federation of Builders has issued a damning "we told you so" statement, criticising the Government for its lack of support for smaller construction companies.
Yet, thousands of SMEs around the UK continue to survive and succeed. Sadly, small businesses have limited individual influence on the overall economy but, to borrow a strapline from one of the larger success stories, "every little helps." So how are they managing to do this? As we've said before, good planning is essential but, in my opinion, there are three key elements that help SMEs through tough financial times:
Whether going in, or coming out, recessions are all about confidence. Currently the UK's major corporates, like the banks, are awash with cash but lack the confidence to spend it and that impacts on smaller businesses. The banks say they are willing to lend but no-one is confident enough to borrow. However, SMEs which project a proactive, confident appearance to customers, suppliers and others in their own sector often find business comes to them. Success breeds success and strength in numbers from a confident bunch of SMEs can be a powerful influence.
2. Added value
In recession, there is always a temptation to look at pricing as an immediate solution to keeping hold of customers. In fact, slashing prices is often the swiftest road to ruin as running at a loss, or close to it, is not sustainable. Instead, SMEs need to look at adding value. I recently had my car MOT'd. Most garages expect you to take your car to them, leave it for the MOT and collect it at your convenience. The garage I used wasn't any cheaper than my local place, but they collected my car, tested it and returned it to my office at no extra charge. This added value means I'll now also use them for servicing and repairs and my local garage has lost my custom. No price slashing, just a simple value add that makes all the difference.
Marketing and PR are, along with staff training, usually the easiest and most identifiable overheads to be cut first in a recession. In fact, this is another false economy. In the same way as a price war, making a business invisible and staff underskilled is a dangerous strategy. Marketing goes hand-in-hand with projecting a confident image. If a business is visible and active in recession, with good customer care and skilled staff, it is already ahead of the silent, sullen competition once the upturn begins.
Let's be clear, I'm not advocating a policy of spend, spend, spend in times of recession. However, a confident, value-driven and proactive approach might just help deliver an unexpectedly positive outcome.