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The dip in headline inflation in late 2023 was encouraging. However, many UK small and medium-sized enterprises (SMEs) still face big challenges, with continuing high price rises and customers cutting discretionary spending.
Firms are still adjusting to higher interest rates, which many economists expect to become a “new normal” level. The impact of rising energy costs, supply-chain issues and geopolitical instability are also still playing out.
Meanwhile, from April, the UK will introduce a new National Minimum Wage, plus there is a General Election expected in the second half of the year. So business uncertainty looks set to continue well into 2024. These trading conditions could impact your margins for the year ahead if you don’t address them now in a formal, dynamic long-term plan.
Let’s look at how savvy firms are writing and reviewing their three- to five-year business plans to navigate these challenges.
Why you need a long-term plan
It’s possible to make short-term changes to address some of the challenges facing your business, such as higher interest rates and wages. But if these actions are not part of a formal, documented long-term plan, they will likely be piecemeal and could lead to unintended consequences.
For example, cutting essential marketing spend or passing on price hikes in your supply chain without careful planning could dramatically dent demand for your products, leaving you weaker as the downturn eases.
Martin Brown, CEO of business consultancy Elephants Child, says: “SME owners should alter their plans as circumstances change. Opportunities, challenges and risk – be they emergent or planned – emphasise the need for plans to be agile and adapt. Many business leaders don’t have a written plan – they just do it in their heads, following their gut or making assumptions. As a consequence, they can end up doing nothing, waiting for things to play out or acting in a knee-jerk manner. They may also make insubstantial changes, such as cutting costs arbitrarily or because of bias, without being informed or having modelled the impact on the plan.
“These companies can drift dangerously, with no control over direction, which they can’t afford to do in a highly competitive environment. Businesses need to get on the front foot and model the impacts of current challenges so they can act.”
How companies are changing plans
As economic factors change, businesses should update their sales and cash-flow forecasts regularly and factor these into their long-term plan.
How you adjust your plan depends on your business model and sector, but some of the most common changes among SMEs currently include:
• Reviewing capital structures
• Analysing costs
• Driving operational efficiencies
• Looking for growth opportunities
With interest-rate pressures continuing, Martin says that many companies are also thinking about refinancing or consolidating the financial instruments they accumulated during the pandemic into something more predictable and affordable.
Economic downturns also bring the threat of non- or late payments from clients, which can hit your profits. Martin says he has noticed some businesses are watching their customers’ financial positions more closely to head off any problems, and/or using trade credit insurance to protect against bad debt.
A few savvy companies are also building a deeper understanding of their credit ratings so they can optimise the credit available to them, says Martin. Others are adopting dynamic pricing, which allows them to pass on price changes caused by supply-chain issues or wage inflation quickly.
Smarter cost cuts
“We encourage our clients to look at all their spending and understand what drives return on investment and enhances cash flow and what doesn’t,” says Martin. “For example, if some marketing spend doesn’t generate enough client acquisition to merit the cost, they might turn that off and reinvest it in other, more effective parts of the marketing mix.
“This can make a big difference to long-term plans. For example, saving £20,000 from marketing budgets on a business worth five-times profit could add £100,000 to its value.”
Many companies are also pursuing digital initiatives to streamline operations, reduce overheads and protect margins. But, again, you must do this as part of your long-term plans to avoid cutting essential budgets, damaging profits and leaving you weaker long term.
Looking for opportunities
Downturns can throw up opportunities too, and some SMEs are adjusting their plans to accelerate out of the downturn. Some well-run companies have shifted from organic growth to acquisition models (growth by buying other companies) to take advantage of cheaper company valuations.
Others are exploiting gaps in the market as they appear by expanding into new geographies, services or client segments. Others will use the softer labour market to acquire talent.
Martin says that SMEs are usually so small within their markets, there is often much market share to gain regardless of the economic context. If other companies are going insolvent, now could be a perfect time to pick up new customers, too.
“The first thing smart companies are doing to update their long-term plans is improving their understanding of what drives value in their business,” he says. “They’re educating themselves about this, then refining their proposition to take advantage. For example, the owners of a wealth-management business might identify their client base as older, so make plans to attract the next generation, which will increase its value to potential buyers.
“They are also waking up to value creators, such as environmental, social and governance (ESG) and digital channels, and creating strategies around them. A long-term plan must show potential buyers something about both these agendas.”
Concentrating more in long-term growth areas such as ESG and digital can help you boost your brand and emerge from the downturn with a stronger competitive advantage.
Why change long-term business plans now
People cannot understand unwritten plans telekinetically, says Martin. Noodling ideas in your head is not enough to keep your business intact and moving forwards. You need to bring others with you, including clients, internal teams, investors and suppliers.
Articulate and write down your plan and how you will deliver it, then review it regularly.
This is the time to act with intent. Get your plans in place so you’re set to face 2024 with confidence.
We can help you to understand how your business and personal finances can feed into your long-term plans. So why not call us today.
We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for exit and sale.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
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