How to make a profit during a double dip recession

Chris LillySenior Partner

Mayfield Business Group (MBG)

What is a recession?

• A period of general economic decline typically defined as a decline in Gross Domestic Product (GDP) for two or more consecutive quarters.

• Typically accompanied by:

– consumers cut back on their spending

– decline in revenues for some businesses

– drop in stock market values

– increase in unemployment

– decline in house prices

What is a double dip recession?

• Initial recession followed quickly by a second one

• Occurs when: – growth after the first recession is weak– further bad news e.g. tax rises, ongoing reduction in consumer spending

– weak exports due to slower recovery abroad

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10

% changein GDP

How recessions affect businesses

• Customers stop spending

• Customers reduce / defer their spending

• Customers spend elsewhere

– buy cheaper products

– use outsourcing

• Banks

– lend less

– charge more interest

– require more guarantees for loans

Successful sectors in a recession

• Repair firms– Car repairers, shoe repairers

• Low cost shops– Pound shops, low cost supermarkets, low cost second hand cars,

low cost clothing shops

• Businesses selling staples– Food

– Clothing that is not readily repairable eg underwear, socks,

• Businesses offering good value for money– eg Morrisons

• Up-market restaurants

– Where the wealthy still spend their money!

Cash more important than profit

Why is that?

• Can’t pay bills = business failure

But note that profit is important for:

• Shareholders dividends

• Re-investment

• Reserves

In difficult times cash trumps profit!

“Revenue is vanity – profit is sanity!”

Definition of profit

Typical %

100%

50-75%

20-30%

10-30%

Total revenues

Gross profit

Operating profit

Net profit

Direct costsEg cost of sales

Indirect costs egManagement,Admin, Sales & marketing costs etc

Other non-operating income,Interest income etc

Reserves, Dividends

£

How to maximise profits

• Maximise revenues– Increase prices

– Increase quantities sold to each customer– Increase number of customers

• Minimise costs– Direct

• Products bought in

• Raw materials• Production costs

– Indirect• Sales and marketing• Administration and management

• Overheads

Increasing sales

• Sell more of same– volume discounts (also BOGOF, 3 for 2 etc)

– time related eg sales

• Sell more different products– upselling– loyalty schemes

• Sell to more customers– increased visibility– word of mouth promotion– introduction schemes

• Increase prices

Decrease direct costs

• Negotiate lower prices with suppliers

• Find cheaper sources e.g. China, India

• Reduce production costs– improve operating efficiencies – just in time manufacturing– reduce unit costs

– reduce production staff / part-time working

• Outsourcing

• Insourcing

Decrease indirect costs

• Reduce non-production staff– number

– hours worked

• Pay cuts

• Get best prices for energy, telecoms, insurance, etc

• Downsize

• Smaller / fewer premises

Managing marketing costs

• Reduce them?– Cutting marketing costs reduces cash spent– But such cost-cutting might reduce sales and revenues?

• Increase them?

– Increased marketing in a recession might increase customers / revenues

– Maximise cost-effective marketing techniques eg referrals (word of mouth)

Marketing strategies- word of mouth

– Networking

• Chambers of Commerce• IoD, etc.

• First Friday

– At networking events you may sell to • the person you are actually talking to

• the people that they then talk to

• other people they know

– Let customers do the selling for you - ie referrals!

Marketing strategies- B2B

• Direct approaches – especially by letter

• Email / call / meeting

• Advertising

– trade magazines etc

– ‘A’ boards (trade boards)

• Press releases

• Articles / white papers

– magazines, web-site etc

Marketing strategies - collateral

• Brochures

• Web-site

• Business cards

• Brand

• Logo

• Trade boards

Financial strategy

• Improve cashflow– Cash with order– 30 day terms

• Charge interest for late payment

• Chase bad debts (use small claims court if necessary)

• Minimise tax (use all allowances, capital / R&D tax credit etc)

• Reduce debt (if appropriate)

• Reduce interest payments (especially if high interest rates apply)

• Change bank (for better terms)

Funding in a recession

• Debt finance

– Enterprise loan guarantee scheme

– Banks

– Family & friends

– Grant funding (usually needs to be matched)

• Equity finance

– Angel funding

– Venture capital funding

Tips for raising funding

Need a coherent and compelling Business Plan:

– Need to show viability of business eg

• Good growth prospects

• Confirmation of adequate customer

demand at the given prices

• Ability to repay debt with interest

– Explain why extra cash is needed

– If VC or Angel funded then need to show Return on Equity

of >>5 within 3-5 years

About MBG

• MBG was established to help small and medium sized businesses be successful.

• The MBG team comprises business experts with over 100 years of combined business experience and includes qualified business advisors (Business Link / SFEDI approved)

• The MBG team and its associates have expertise in every business functional area including:

– sales and marketing - finance – business strategy - human relations – business development - R&D – operations - engineering – manufacturing - health & safety etc– legal

MBG offers:

• Specialised business advice

• Preparation of business plans

• Raising funding

• Mentoring and coaching

• Training

• Business support

• Telephone support service

• Business fact sheets

Before you go

MBG is offering a free business clinic today in the hall from 1200 -1600 hrs (30 minute slots available)

Please leave your details if you wish:

• To sign up for a free business clinic session

• To register for future seminars

• To receive future e-mailings from MBG

• To join MBF (free membership)

• To benefit from the services of MBG

Contact details

Roger Stone

Mayfield Business GroupWarren Bakery,

Fletching Street,

Mayfield, TN20 6TW

Tel: 05603 44 49 90Mob: 07776 14 40 56

Email: roger.stone@mayfieldbusinessgroup.com

Website: www.mayfieldbusinessgroup.com

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