At a time when many small businesses are experiencing considerable financial strain, as a result of the coronavirus pandemic, some have taken swift action by adapting their businesses to meet the needs of the market.
But could more businesses avoid insolvency by considering a diversified future?
A growing number of businesses are attempting to turn their fortunes around – some with considerable success – by making fundamental changes to their product offering and/or their way of working. Most have been forced to do so because their revenue stream has either disappeared completely or shrunk considerably. Whilst businesses in the hospitality, leisure and retail sectors are among those worst hit by the new stay-at-home rules, suppliers to these sectors, such as specialist food producers and wholesalers, have also been affected.
It won’t always be possible, but all businesses should consider whether they can deploy their assets differently. They won’t have to look far for inspiration, there are many examples of brewers and gin distilleries across the UK finding a new use for ethanol supplies by making hand sanitiser, manufacturers with 3D printers making much-needed PPE and face shields and some wholesale food companies have started up home deliveries.
Those businesses that already handle online sales, have expanded this activity and introduced new products in order to optimise revenues where they can. Depending on the nature of their activities, these businesses may qualify for R&D tax relief, which can have a positive impact on cash flow at a critical time.
With lower fixed costs, flexible lease arrangements and fewer people to manage, small businesses often have the entrepreneurial spirit and agility to adapt to market changes quickly. Uncertainty about how long the current situation might last makes longer-term planning more difficult. Diversification could be a quick-fix solution, but will it work in the long run? Another challenge is whether a business can afford to resource the changes required for a new world order?
Here’s some advice for business owners who might be considering a diversified future:
- Does it make financial sense? – For some business owners, the disruption caused by the current situation could be the catalyst needed to rethink their whole life plan. Before turning their back on their current business model, they should weigh up the business case carefully. Consider the cost of doing nothing, versus the cost of diversification.
- Know your core competencies – If you want to diversify your business quickly, it makes sense to play to your strengths. If your business is to provide dance, fitness or music classes, could technology enable you to continue this despite not being able to bring people together in the usual way?
- Assess your assets – Does your business have assets that could be deployed in a different way? For example, a vehicle rental company experiencing reduced demand could consider using its fleet to make home deliveries instead. The key test to consider is whether there is a market for the new service offering.
- Do you have access to the right expertise and resources? – Before deciding to make fundamental changes to business operations or reaching out for a bank loan, it makes sense to consider first whether you have the expertise and resources to make a success of it. If you need to bring in additional skills or expertise to support the business, can this be achieved cost effectively?
- Make the most of your investment – If you are intending to invest cash reserves in order to develop a new product or new service offering, it might be possible to make a claim for R&D tax relief. Business owners may not be aware that even if they are making use of existing machinery to make products that already exist – such as hand sanitiser, ventilators or PPE – these activities may still qualify as R&D because the method of manufacture and processes involved may not be in the public domain. The business owner may need to find new ways of using existing equipment; overcome technical challenges and create new processes, all of which are likely to be eligible for R&D tax relief.
- Look for stepping stones – When considering a strategy of diversification, business owners should aim to de-risk the process as far as possible. Sometimes it is possible to make a relatively small step, vertically or horizontally, which opens the door to a new market. If you run a training company for example, you could drill up or down by providing a broader range of training courses. Or a catering services business could reach out horizontally by offering home-delivered cookery boxes.
As well as making the most of their ability to react to market changes quickly, small business owners must continue to plan for the long term. Whilst it may make sense to use some cash reserves now to find an alternative revenue stream, it is also important to plan for market recovery.
