A tight rein on spending is rule number one in a recession. But how do you control your costs and stay competitive? Finance experts and downturn survivors offer tips

Alistair O'Reilly, managing director of Access Technology Group, learned his cost control and cashflow lessons in what he calls the "real recession". In 1991, little more than a year after he'd launched the company, which provides accounting software and services, 38 customers went bust within six weeks. They knocked a £118,000 hole in its then £1.1m turnover.

"It was," recalls O'Reilly, "very, very bad news." What made it worse was that the company had borrowed a large sum to build an extension to its premises. "Cashflow was extremely important," he notes. It was time for drastic action.

"I put more people on to cash collection than sales. I took sales people off the road to go and collect cash," he explains. "I divided up the list of debtors and gave individual collectors targets for what they had to collect. We reviewed debtors' lists twice a day and revised our plans accordingly.

"We met the bank once a month and sent it progress reports every week. We gave them so much information, they sometimes asked us to send less. In the end, being absolutely on top of our numbers enabled us to succeed and move forward."

That searing experience has come back to O'Reilly during this recession. "We've gone back to the lessons learned in previous times," he says. The company is much bigger now—£23m turnover and growing fast—but it still needs to manage cash and cut costs. Since the downturn started, O'Reilly has doubled the company's contingency for bad debts—even though, so far, that hasn't been needed.

He's also put some capital spending plans on hold. He reckons the firm will save nearly £80,000 by developing a data centre project in-house rather than outsourcing it. "By keeping control of costs and managing cash, we're in a strong position to continue growing," the managing director points out.

O'Reilly's response to recessions past and present is a classic example of best practice, according to business and accounting experts. "Businesses don't go bust—they run out of cash," says Ashley Ward, chief executive of the European Leadership Programme, which trains founders and managers of high-growth businesses. "So the key to corporate survival is to run a business that you can manage easily and effectively with the available capital."

Donald Forsyth, a business advisory services partner at accountancy firm Scott-Moncrieff, says: "Cost-reduction programmes should be led from the very top of the business. Reductions must be sustainable and not window-dressing. Don't blindly slash budget headings such as training or marketing, or carry out cost-cutting based on budget variances, without considering what the underlying activity actually represents.

"If increased marketing spend will deliver more profitable sales, then an overspend on marketing in comparison with the original budget is sensible. Under-spending on health and safety may look good on paper—until there's an accident."

Yet although there are sound general principles for cutting costs and managing cashflow (see checklists below), every business has a distinct profile of opportunities and dangers. John Charles is managing director of Catering2Order, a £400,000-turnover business that has contracts with prestigious clients, including the Cabinet Office and the Olympic Delivery Authority. One of the biggest controllable costs in the catering sector is wasted food, says Charles. He has cut waste by 35 per cent since providing a core menu and asking customers to text or e-mail their lunch orders. "It allows us to get what we provide near enough right," he says. "Clients like it, too, because they can put forward suggestions for new dishes."

Charles has set up a system to control all spending in his fast-growing company. "There's a set procedure for acquiring items whether office stationery or equipment," he explains. "The requisition has to explain why it's needed and one person signs off all expenditure."

On cashflow, Charles is rigorous about monitoring forecast revenue and spending against actual figures every month. He explores the reason for large variances, and reviews suppliers frequently and looks for better prices. "It's about being up to date with financial information," he explains.

Forsyth urges all small and medium-sized businesses to make sure that targeted cost reductions actually happen. But he warns: "Bear in mind the behavioural aspects of cost reduction. Guard against those who regard the budget as both the minimum and maximum spend, rather than authority to spend up to a certain limit if the circumstances warrant it. Good budgeting helps businesses understand the link between activity and cost. Try to lower the break-even point."

One of the best ways to boost cashflow is to get customers to pay in advance. That's going to be an impossible dream in many firms, but it can become a reality for others if they approach the challenge in a creative way.

Russ Bryan is a director of Ascension Consulting, a £500,000 marketing consultancy that has cracked the conundrum. Bryan's proud boast is that the company has never had any bad debts because it gets clients to pay for services in advance.

"We do a lot of pre-work before we start charging a client and this builds up a high level of trust—people appreciate that we're going that extra mile," he explains. "It means the company is in a position to ask for some upfront payment when it comes to sign a contract."

Typically, he'll request half the fee in advance from an established and stable company, but all of it from an overseas customer or home-grown one where there are suspicions they may not be able to pay on time. The key to getting the upfront payment is to make sure that the preliminary work delivers real value to the company, says Bryan. "For example, we signed up a computer software company after we'd already got a magazine to write a profile about it."

Most firms, though, need to focus on getting paid promptly after they've done the work. "Talk to your customers early and commit to payment dates at the start of trade," says Ward. "And as for customers who regularly pay late—lose them. A customer is only a customer if they pay."

Ward is also doubtful about the value of discounts to prompt timely payment. "Customers pay late and take the discount anyway," he notes. "More effective is a rebate strategy against the next order. It offers an added incentive to pay on time and keep coming back."

The problem is that, in a recession, most firms try to hang on to their cash for as long as they can. So the only way a company can boost its cashflow is by winning new business or cutting costs. But capturing fresh orders may be impossible if customers aren't spending. So cost-cutting becomes the key focus of improved cashflow.

At the Real Deal Costume Company, a £2m-turnover business that hires and sells fancy dress, managing director David Denholm has slashed staff costs by two-thirds through outsourcing book-keeping and website servicing to India. He reckons the company also saves around £21,000 a year on office rent and more than £6,000 in equipment and telecoms charges as a result of moving services overseas.

JDMarketing, a public relations company with a £1m turnover, has never needed an overdraft or loan since launching 11 years ago, says director Jacqui Freeman. The business reckons it will get through the recession without one by keeping a close eye on costs.

"We look at our business bank balance every day," she says. "We move money in and out of deposit accounts to ensure that we're always getting the best interest rates. Where client expenses are generally large, we ask them to deposit funds in advance to cover costs so as not to impact heavily on our cashflow."

One area that SMEs often overlook when they're trying to maximise cashflow is tax planning, says Graeham Sampson, financial director of Montpelier Chartered Accountants. "Typically, an SME will complete its tax return towards the end of the period allowed by HMRC," he explains. "But if previously paid tax is due to be repaid under the current tax return, then it may be beneficial to complete the return sooner."

When cash is tight it's important not to ignore any potential source of funds. As O'Reilly discovered in his "real recession", collecting cash becomes the number one business priority when the bank balance is running low.

And Forsyth points out: "Nobody ever went out of business because they had too much cash."

10 ways to cut costs

1 Keep staff on board
Cost-cutting measures are often unpopular, but when staff understand that their jobs may depend on them, they'll play along.

2 Improve business forecasting
When you have a clearer picture of future trading conditions, you can make more reliable resourcing decisions, on everything from staff levels to materials and marketing spend.

3 Analyse spending
Map outlay on goods and services along a horizontal axis and criticality of purchases up a vertical axis. Divide box into four quadrants. Focus on purchases that fall into the top right-hand quadrant.

4 Review utility costs
Typically, these represent the second- or third-biggest single controllable cost. Shop around to cut utility charges.

5 Control business travel
Some journeys aren't really needed. Look at the purpose of long trips and whether you can get what you need another way, through a videoconference or webcam meeting, for example.

6 Cut the cost of debt
It's excessive (and sometimes expensive) debt that sinks many businesses. Look at reducing the cost of debt by an injection of equity.

7 Automate routine processes
Provide more information on your website. Ask customers to order online.

8 Explore offshore manufacturing
Consider whether all or parts of your products can be manufactured in the Far East or eastern Europe.

9 Use consultants sparingly
Sometimes they save you money—more often, they cost. Consider asking them to work on a contingency basis.

10 Cut directors' perks
It's tough to start at the top, but it sets the right example to the rest of the company.

10 ways to manage cashflow

1 Develop best practice
Keep an eye on the latest news and developments from the Better Payment Practice Group. Make sure staff are trained to use best cashflow practice, including the measures listed below.

2 Check creditworthiness of new customers
This is even more important in a recession than during good times.

3 Speed up dispatch of invoices
Companies can take as long as 90 days to send them after delivering the goods or providing the service.

4 Improve credit control
Negotiate payment terms with your suppliers upfront. Start chasing payment as soon as invoices are overdue. And withdraw credit from persistent bad payers or likely defaulters.

5 Police early-payment discounts
Often buyers take them even though they don't pay within the specified time. Make sure you take advantage of early-payment discounts from suppliers where cashflow permits.

6 Explore ways of financing payment
Direct debits can spread payments over months and ease cashflow where a large item has to be purchased, as well as reducing the cost of making the payment.

7 Bank cheques and cash on the same day
Sounds obvious but some small businesses don't do it. Arrange paying-in facilities with the nearest available bank branch to make it as easy as possible.

8 Invest surplus money
This may simply mean sweeping cash over a certain limit in current accounts into an interest-bearing deposit account.

9 Seek government/European Union money
Grants are a jungle, but they can produce useful cash.

10 Bank over the internet
It saves time and encourages you to adopt a more proactive approach to managing your finances.