Can businesses afford to take risks in the current economic climate?

The UK economy is now out of technical recession. Growth has returned to the country, after one of the deepest periods of economic contraction in recent history.

Despite the agility and adaptability of small and medium enterprises (SMEs), many of them have been particularly badly hit by the recession. But, as the economic climate has improved, so too has optimism in the small business sector. Many businesses are seeing their order books gradually swell, and consumer confidence is on the up. As a result, business managers are beginning to consider what could be risky choices in an effort to make the most of the opportunities provided by a newly expanding economy.

But many analysts continue to preach caution, suggesting that the apparent recovery could be easily derailed. So, as a small business owner, can you afford to take risks in this economic climate?

What is the outlook?

Decision-making and forward planning have been made significantly more difficult given the lack of consensus regarding the economic outlook. While many predict that the UK economy is now back on the straight and narrow, with the proviso that a recovery is likely to be slow, others staunchly believe that we are headed for a second fall. The prospect of a double-dip recession remains real. Were it to occur, it is generally thought that the second contraction would be deeper than the first.

There is also concern about volatility in the labour market. Many analysts predict a spike in unemployment, which could have a disastrous effect on consumer spending. Similarly, fiscal and financial concerns abound; a rise in interest rates is expected at some point in the medium term, and inflation looks set to rise. These combined pressures could be enough to put the brakes on consumer spending.

What are the risks?

Business failure is a significant risk in the current economic climate. Research shows that corporate insolvencies tend to peak around 18 months after the end of a recession, and there is no reason to believe that things will be different this time. Failures tend to increase as suppliers begin to tighten their credit controls and chase outstanding invoices. This increased cashflow pressure can be enough to tip firms into insolvency, even when they may be profitable.

There are also concerns about forecasts made by business managers. Some analysts worry that SME managers are making over-optimistic sales forecasts for the coming 24 months, believing that sales will pick up more quickly than is realistic. This is likely to cause cashflow problems – particularly for firms that are looking to expand. Constricted cashflow is one of the most frequently cited reasons for the failure of expanding businesses, and the current climate makes this threat all the more significant.

There is also a pervasive sense amongst managers that the business environment will return to its pre-recession ‘norm’. As many analysts have pointed out, this may not be the case. An increasing number of SME owners are looking at expanding by filling the gaps left by collapsed competitors.

But it is important to remember that these firms may have failed simply because their business models were not viable. The recession has served to pick off vulnerable businesses, and firms that survive should not necessarily think that they can make money providing products or services along the same lines as their previous competitors.

How can you protect your business?

Despite the risks posed by the uncertain economic climate, well managed firms stand to thrive in the current conditions. Levels of corporate insolvency, which look set to rise even farther, have meant that many businesses can easily expand their market share. But it is vital that you protect your business if you intend to grow.

Cashflow is potentially the greatest danger area facing firms that wish to expand in today’s business environment. It is vital that any growth is properly financed, and that expansion can occur without putting undue stress on existing core business activities. In order to achieve this you may need to consider different financing options, including factoring or invoice finance. These products can help to ensure that you have cash on hand to grasp opportunities as they arise.

Finally, you should remember that circumstances are liable to change very quickly, and with little warning. It is therefore important that your organisation is as agile as possible. Think very carefully before directing all of your resources towards a new market; if expansion occurs at a cost to established products or services, you risk destabilising the business as a whole if the economic situation changes for the worst.

Regardless of whether or not you choose to expand, you should try to ensure that you keep a close eye on developments in the economy at large. Although the figures spouted by newsreaders might seem abstract, they may well have a significant impact on the day-to-day running of your firm. Even when the recession is firmly behind us, SME owners should always make decisions with one eye on the state of the UK economy.