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    Tag: recession planning

    The importance of managing cashflow during a recession

    Posted on by Katie Heaton

    With widespread predictions that we are about to face the longest recession since records began, many business owners are concerned about the detrimental impact this could have on their business. As part of our recession resilience series, we take a look at how managing your cashflow during a recession can help reduce the impact of challenging financial times.

    Managing cashflow poorly can result in small businesses struggling, especially during times of recession. Maintaining a healthy cashflow is always essential for your business but it might require some extra attention in this difficult economic landscape.

    Prompt invoicing

    You may find as businesses tighten their belts that sales fall, some customers may put smaller orders in or switch to cheaper options, others may ask you for extended credit terms or discounts for fast settlement. Keeping on top of any money coming into your business from your sales is essential for healthy cashflow. Ensuring prompt invoicing and making sure invoices have all the correct purchase order information attached will reduce the risk of an invoice being put into query, you may also want to request that prompt payments are also made. Using features in Xero such as auto reminders and integrating payment services will help with collecting any outstanding debts.

    Sending statements to regular customers can be a good way of prompting them to pay and remove any risk of them suddenly querying a long overdue invoice.

    Consider your payment terms

    Payment terms generally refer to the amount of time a payer has to make a payment for the service or product you have provided to them. This could be anything from 14 days, 30 days, or cash on delivery and it’s important to include your payment terms on your invoices and statements. This should also include how you would like the payment to be made.

    It is vital to make these terms clear as you may wish to offer a discount to encourage early payment or you could charge interest on any late payments providing you have clearly stated your terms. Using Xero you could have different invoice templates for different groups of customers which may state different terms depending on their payment history.

    Cashflow forecast

    If you don’t already have one, this is a valuable step to take. A cashflow forecast will tell you the expected flow of cash in and out of the business over a certain period of time e.g. 6, 12 or 18 months.

    Such forecasts can be very accurate providing you are realistic with your figures and are likely to consider factors such as income, bank interest, wages, material costs, rent, rates and utilities. Obtaining an accurate forecast of your finances will provide you with a clear outlook as to where you are currently and where you are likely to be in the future. This can help you to plan any steps you may need to take to protect your business, and potentially look to raise extra funds if you think it is going to be necessary.

    It is important to review and update your cash flow forecast regularly to ensure it is accurate when circumstances change.

    Check your profit margins and look to reduce outgoings

    It is always worth going through your outgoings carefully during challenging times to see if there are any areas you can look to cut back on, although they may only be small savings, it can soon add up if there are a few. Consider your bills and whether there are any better deals out there if you were to use a different insurance provider, for example.

    During a recession it is likely that your costs of sale increase, so it is recommended to check your profit margins are in line.

    Get in touch

    For further information or advice on any of the topics discussed above, contact our cloud team manager, Rosie Cooper, using the button below.  

    A comment to note that the article does not constitute personalised advice and that advice should be sought before taking any action.

    Is it a good time to invest during a recession?

    Posted on by Helen Buchan

    With predictions that we could be facing the longest recession since records began, we take a look at whether it can be a good idea to invest during a recession.

    If the moves by the central banks to raise interest rates fail to reduce inflation, it is looking highly likely that higher interest rates could further weaken economic growth.

    However…

    Successful businessperson, Warren Buffett, once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” It may be sensible to take a contrarian view on stock markets: when others are greedy, they may continue to pay a large price tag to buy a share or asset. When confidence is high, people continue to invest and don’t think about downsides. When others are fearful, it may present a good value investment opportunity. You buy more for your money when prices are low! This doesn’t mean to say that values may not continue to fall for a period of time, but it does mean that over the longer term you may derive good value from buying low.

    The impact on investments

    Generally, recessions mean lower stock market prices, therefore higher levels of volatility than normal. The price of a stock should represent the current value of a company’s future cash flows and cash flows are created by the earning of a company. If there is lower spending in an economy, then this means lower earnings for businesses. This may also result in lower dividend distribution from the company to shareholders.

    If perceived earnings are lower, then a company’s share price is also going to drop. With the increased chances of a business struggling or worst case, going bust due to the challenges faced in a recession, the markets also consider this as a risk in share prices.

    Not all stocks are the same

    Different stocks will go up or down more than others in certain economic conditions. Stocks which are more sensitive to the overall health of the economy are often referred to as cyclical stocks and are those which will suffer from a reduction in consumer spending or unemployment rates rising e.g. retailers and airlines, with people spending and travelling less.

    On the flip side, are those who provide something which consumers consider essential, such as utilities and food. These are often referred to as defensive companies or defensive shares and would generally fare better and fall less. Albeit, utilities have seen more volatility than usual due to an unusual set of circumstances.

    Diversification

    It is key that investors ensure they have a portfolio capable of withstanding an economic recession rather than trying to time the market. This means including assets which are likely to do well during economic growth, but also some that are likely to do better during a recession – this is known as diversification! Although it is essential to carefully consider the risk profile, it is usually good to include a broad mix of equities, bonds, and some alternatives. It may also be a good idea to consider a variety of sectors and themes too.

    One rule that is often viewed as a simple way of achieving diversification, is the 60/40 rule. This means having 60% invested in shares and 40% in other diversifying assets and is seen as a sensible theory for trying to smooth out any peaks and troughs of investing in the stock market.

    Bonds

    One of the most common assets that usually perform better during a recession, is government bonds. There are a number of reasons why bonds typically do better and are generally seen as safer than stocks. Governments of advanced economies tend not to default and the income produced by a bond is fixed, this means that during a recession, investors often rush into bonds which in turn can bid up their prices.

    However, it has not been a good year for bonds so far with rising inflation and higher interest rates causing bond prices to plunge. This has resulted in bonds and shares falling together and having a negative impact on those portfolios working to the 60/40 strategy.

    The outlook of bonds therefore rests largely on inflation and how inflation is likely to be impacted by a recession.

    How can we help?

    As always, every individual situation is different, and it is vital to get advice based on your exact circumstances when considering any type of investment. PM+M’s Managed Portfolio Service, is a bespoke investment portfolio produced by us, and managed in collaboration with AJ Bell, to make your life easier.

    Working together, we continually monitor the market and conduct ongoing due diligence in relation to the funds held within the Managed Portfolio Service portfolio. We proactively make fund and asset allocation changes when we feel as though this is necessary in order to manage volatility and drive long term growth. Our Managed Portfolio Service aims to provide you with the best combination of investments to maximise your potential returns with a level of risk that suits you.

    If you would like to discuss your investments in more detail, or need some tailored advice specific to your situation, including more information on our Managed Portfolio Service, get in touch by emailing financialplanning@pmm.co.uk, or by calling 01254 679131.

    The value of investments can fall as well as rise. You may not get back what you invest.

    The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

    How to plan financially for a recession

    Posted on by Helen Buchan

    With forecasts predicting the UK is facing the prospect of a challenging two-year recession, inflation rising at a record rate and the cost of living crisis ever widening, as part of our recession resilience series, we consider some of the ways you can look to prepare financially.

    If possible, save an emergency fund

    During a recession, the risk of redundancy is unfortunately higher and this coupled with factors such as household bills continuing to rise, means it is extremely sensible to have an emergency fund available if at all possible. The ideal would be 6 – 12 months’ worth of expenses but obviously any amount is better than nothing.

    If you are able to raise an emergency fund, it can provide some much-needed peace of mind that you would be able to survive without having to take on additional debts or get in arrears with any bills. It is also important to remember that there can sometimes be unexpected events which arise and require immediate funds at short notice, such as damage to your property or vital car repairs.

    If saving an emergency fund is not an option, which is the case for many right now, then it is always worth looking closely at your everyday expenses to see if there are any savings that can be made there, although these may only be small individually, it can soon add up if there are a few.

    Review your investments

    Considering historical data, we know that stocks tend to rise right into a recession and fall during it. However, it’s impossible to forecast, as both markets and economies are unpredictable.

    It is important to understand that the market can be volatile, and you should aim to focus on the long term. Our Managed Portfolio Service is a bespoke investment portfolio produced by us, and managed in collaboration with AJ Bell, to make your life easier.

    Of course, when a recession is predicted, it is completely normal to worry about your investments. Working together, we continually monitor the market, conducting ongoing due diligence and proactively making fund and asset allocation changes when we feel it is necessary to manage volatility and drive long term growth.

    If you do have spare cash, there could be an opportunity to buy whilst markets are devalued; this could represent good long-term value.

    However, if your cash isn’t available to invest for at least 5 years, it’s worthwhile reviewing bank interest rates to ensure that you are capturing the most efficient return.

    Examine your mortgage

    Look ahead and speak to a mortgage expert before there are changes in your circumstances or any fixed rates come to an end. Unfortunately, it is looking likely for many that a rise in interest rates is inevitably going to lead to higher mortgage payments so it is sensible to start looking now at ways you are potentially going to be able to manage this. It may be necessary to look closely at your monthly expenses so see if there are any possible savings to be made which could cover a rate rise.

    Are you protected?

    Most people’s greatest asset is their income so in uncertain times, it’s more important than ever to make sure you are protected if you were to become unable to work because of illness or injury. Income protection or critical illness cover could provide a vital financial lifeline to you and your family should the worst happen and you become too ill to work.

    Another one to consider could be mortgage life insurance which would provide a lump sum to your family if you were to die prematurely. This could remove the huge burden of having to cover the remainder of the mortgage debt for your family in this difficult situation.

    Think carefully about your pension

    When faced with difficult financial challenges, it could be that your pension is low down on your priority list but this could prove to be a costly mistake in the long run. Your pension provides a great, tax efficient way to save and it is important to protect it, even when cutting back on your contributions could make life easier in other areas.

    If you are getting close to retirement and are concerned that your pension fund may have decreased in value because of the falling stock market then speak to your pension provider, for most, this shouldn’t be a problem as the level of risk for a pension portfolio decreases as you get closer to retirement age.

    If you don’t already have a pension, it could be a good time to consider starting one as if you look to invest while the stock market is low, it can provide more opportunity for higher returns in the longer term.

    Summary

    There is no doubt that the coming months are going to be a huge challenge for many but considering some of the above factors in advance and being pro-active with planning for the worst, could make a huge difference to your financial outlook long term.

    Get in touch

    For further information or advice, contact a member of our financial planning team today to talk through your personal circumstances, email enquiries@pmm.co.uk or call 01254 679131.

    A comment to note that the article does not constitute personalised advice and that advice should be sought before taking any action.

    Recession-proof your business: How to manage your business during a recession

    Posted on by Helen Buchan

    With forecasts predicting the UK is facing the longest recession on record, inflation continuing to rise and the cost of living crisis ever widening, as part of our recession resilience series, we consider further steps you can take to help manage your business effectively during a recession.

    Many businesses are still struggling to recover from the pandemic and this coupled with an uncertain road ahead, means it’s hard to predict how many will be strong enough to ride out these challenging times.

    Who is your customer?

    With a continuing drop in consumer spending because of the cost of living crisis, this is impacting a lot of businesses who are having to look to potentially change their focus in order to survive. It is for this reason that it’s vital to know your customer well, know what they are looking for and also how reliable they are. It may be sensible to mitigate risk in some areas by reducing your reliance on customers who potentially have a higher financial risk exposure.

    You could look to carry out regular credit checks to monitor customers’ performance and it may be worth considering who your ‘perfect’ customer is, in comparison to those which may be higher maintenance or providing less value because of reduced operating margins. Sales and procurement teams are often able to provide some useful market intelligence.

    Mitigate your risks

    A recession has the potential to trip some businesses up when it hits at the wrong point in their working capital cycle. Although this depends heavily on your company’s operating model, you could run the risk of being left with excess stock or work in progress that you are unable to realise value from.

    To mitigate a further risk, ensuring you have a range of suppliers who are providing any critical products and services can be a wise idea to help lessen the risk of an individual supplier failing.

    Keep on top of debt management

    One way you can protect your cashflow is to control your debt management and ensure any money that is owed to your business, is paid promptly. If interest rates are to rise and loans paid to the business become more expensive to service, it could be a possibility to consider restructuring debt finance to reduce cost in this area.

    Keep morale high

    During challenging times, it’s important for business owners to take a proactive approach to leadership and consider ways of motivating team members. By doing this, you are going to be in a better position to retain skilled people and get the most from their abilities. This was vital during the pandemic but is just as important now. You should also think about any additional support team members may need during an economic downturn to increase their morale and general wellbeing.

    Seek advice and plan ahead

    If you would like any further information or advice on how you can implement any of the above suggestions or help with planning a sensible approach tailored to your business, contact a member of our recession resilience team by calling 01254 679131 or email enquiries@pmm.co.uk.

    A comment to note that the article does not constitute personalised advice and that advice should be sought before taking any action.