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Managing Tight Resources and Restoring Profitability | |
While the UK economy dodged recession at the end of 2022, it is not out of the woods yet with the Bank of England still expecting to see the UK enter recession this year. With many companies already struggling, all it takes is a rapid shift in the market, new disruptive technology or series of late customer payments for profitability to be materially affected.
Many will have already slipped out of profitability and must adapt or restructure to restore profitability and remain viable.
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For these businesses, step one in restoring profitability is to identify where the business is losing money, and only then will they be able to develop a strategy to address the issues. Businesses therefore need to understand their cash position in close detail. Cash is key and if it dries up, the business will suffer or may even fail so it is crucially important to have a strong understanding of the company’s cash position, incomings and outgoings. | | | |
Once the cash position is understood, the business can get to work on a strategy to restore profitability. And while every business is different, experience tells us that this strategy is likely to include a range of actions:
Reducing Costs
Reducing costs is often a fundamental part of restoring profitability. Business’ must look at their key cost areas and work to tighten up control and cost management. Part of this will mean making cuts but while most businesses can find ways to cut costs, it’s important not to do so at the expense of product and service quality. Companies should start any cost-cutting initiative by looking at all the places costs could be reduced and plan out scenarios to understand what will happen when those cuts are made. | |
Key cost areas to look at include: - Premises – Are you getting the most out of your premises? Is there a more efficient way you could use them? Do you need so much space now that more staff are working from home?
- Finance – Debt represents a significant cost for many companies but with the right advice, you may be able to negotiate more competitive terms on your finance facilities or understand how to use loans or overdrafts more effectively
- Production – Are you able to reduce waste in your production line? Can you implement new processes to improve efficiency, reduce line switchover time or cut inventory levels?
- Suppliers – Can you negotiate better terms with your suppliers? Can you buy on a Just-In-Time (JIT) basis to reduce the amount of working capital that’s tied up in inventory?
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While carrying out this exercise, it’s important to remember that there’s a fine line between cost cutting being beneficial to the company’s cash position and being detrimental to the business’ operations. Business leaders should approach with caution and while it can be easy to cut spending on marketing and business development, ask yourself if reducing the top line is worse than making savings on the bottom line.
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Increasing Efficiency Increasing efficiency so you can do more with less is a key way to restore profitability. Technological advances make it easier than ever to streamline or automate processes and complete tasks more quickly and consistently. Efficiency can also be increased by boosting the productivity of your staff. This is why communication is crucial. Getting staff members on board with your vision will help them to feel part of the ‘effort’ and will reassure them that you value their input. | |
Increasing Revenue
Increasing revenue is another way to restore profitability and there are many ways to do so although most take time to enact and begin making a difference to the bottom line. Actions might include: - Expansion into new markets
- Forming partnerships
- Altering pricing models
- Developing new products
- Launching add-on products and services
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Downsizing or closing loss-making departments or products Sometimes, downsizing or closing loss-making parts of the business might be necessary but if not carried out properly, there can be undesirable repercussions. If considering this as an option, it’s important to look at all the potential consequences and be sure that the value created will outweigh the potential damage to the company’s reputation and morale of remaining employees. Communicating with suppliers and lenders Maintaining open communication with key suppliers and lenders is crucial when finances are tight. A lack of communication is often perceived negatively and doesn’t help to build trust. Show your lender that you have a solid plan to restore profitability and that you are capable of making the necessary decisions. | |
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Catch up on our latest webinar - Managing Businesses in Uncertain Times - Directors' Responsibilities | |
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In our latest webinar our insolvency specialists, Sandra Mundy and Sue Staunton, discussed what Business Directors should understand regarding their responsibilities and obligations and provide insight into how to mitigate risks that they may face whilst navigating the UK’s challenging economy.
This webinar covered the following topics: - What is a Director?
- Specific obligations and responsibilities for Directors
- Consequences of a breach of Directors' duties
- Mitigating the risks
- Insolvency implications and recovery
If you have any questions about the topics raised in our webinar and how we can help you and your business, please contact Sandra Mundy or Sue Staunton.
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It's important to note that the right approach to restoring profitability will depend on a company's specific circumstances. It can be a complex process that requires the help of specialists to get right.
Please contact one of our TRI team for more information or to discuss any difficulties your company may be experiencing. Watch out for further newsletters from us, covering a variety of topics for restructuring your business.
Kind regards
Paul Davies
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The information in this newsletter must not be relied on as giving sufficient advice in any specific case. | | | |
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