There’s a downside to every upturn, which is why it pays to think ahead

After a turbulent few years, there are now plenty of signs of recovery in the British economy. Inflation and unemployment are falling and business confidence has picked up markedly. In theory, this paints a rosy picture for small and medium-sized enterprises, but the reality may be rather more complex. In fact, there can be a number of hidden dangers at the start of any upturn. And it’s only by working closely with your professional advisers that you can be sure of avoiding the pitfalls.

The first and perhaps most obvious thing to say is that many businesses have stretched themselves to the limit during the downturn. Weathering a recession often means living on reserves and relying on the good will of creditors and HMRC.

Banks – although much criticised in recent years for their reluctance to lend – have often been reticent about pulling the plug on long-standing clients who have been struggling to survive. Now that the climate is changing for the better, there’s a tendency for decisions to become more hard-headed.

Debt can start to spiral during the economic hard times too. How many small business owners have over-extended themselves, perhaps taking on personal liabilities by extending their mortgages or even maxing out their credit cards? With interest rates likely to rise from their historic low in the medium-term, pressure will soon be mounting.

So the irony of an upturn is that it can actually signal a potential rise in insolvencies. That’s why forward-thinking businesses need to plan ahead – working closely with their accountants to draw up a strategy for survival and ultimate growth. Honesty is definitely the best policy. There’s always a danger that you can stick your head in the sand and pretend that everything will work out.

With the help of your professional adviser, you can look objectively at critical issues such as your product range, margins and terms of business. You can also examine capital expenditure and staff resources. This can result in the kind of robust cash-flow predictions that are able to withstand scrutiny and stress-testing.

A good approach might be to go to your bank with a revised business plan, providing a ‘state-of-the-nation’ report. Even if it’s just an honest recognition of problems and a statement of how you intend to survive the next couple of years, it will be a welcome sign that you’re addressing the issues that need to be tackled. And the fact that you’ve involved your accountant to provide a holistic overview will undoubtedly give the exercise much more credibility.