By Sam Rudland, Managing Director, Essential
I started Essential, a b2b technology and channel PR & marketing agency in 2002.
At that time a lot of our revenue came from technology resellers who wanted to run campaigns leveraging their marketing development funds (MDF). Vendors typically funded 50% of the cost of the marketing activities their resellers wanted to do. In those days vendors were open to all sorts of creative ideas and provided generous amounts of joint marketing funding.
We also worked with a very large IT distributor and in most cases, they were able to secure 100% funding from their vendors. This gave us confidence that our clients would usually have 6 months’ worth of joint marketing funds available to them.
When the 2008 financial crisis hit, we found out rather rapidly that we were wrong.
As a business we had been growing at a fast pace and we were hiring people left, right and centre. We’d taken on new offices a few years earlier to accommodate our growing team and our overheads were high.
With a recession looming, we learnt the hard way that marketing is often cut first.
Our reseller clients disappeared first, as the slowdown meant they were no longer prepared to invest their 50% of the MDF funding to maintain a pipeline of leads.
Some of our smaller clients defaulted on outstanding invoices.
Two months after the banking crisis erupted, we were in serious trouble, caused by our run of cancelled projects and bad debts. And caused by overconfidence and lack of foresight.
We had been so confident that business would just keep booming that we had reinvested every penny we’d made back into our new offices and new hires. We didn’t have the foresight to plan for a downturn and had no cash reserves and had to make some of the hardest decisions I’ve ever had to make quickly to prevent the agency from going under.
We didn’t need the same number of staff to service our decreasing workload, so it was obvious that I’d need to scale back the number of employees. It was the logical decision, but it was far from easy.
Less staff meant we wouldn’t need such a large office and downsizing would help to reduce our overhead quite considerably. We were tied into a lease with a dilapidations clause, and I had no idea how to try to get out of that, but I learnt fast.
Six weeks later we were a much smaller agency working out of a serviced office, but we were still trading, although I didn’t pay myself a salary for six months to ensure we kept afloat.
My focus from that point forward was on increasing our profitability and building cash reserves so that we were better prepared next time a crisis hit, because it will hit, history has taught me that. We now always have six months’ worth of overheads in the bank. And now, as we seem likely to go into another recession, I feel far more confident about our future than I did in 2008.
Having those cash reserves gives you time. Time to plan. Time to look at the challenges your clients are facing. Time to come up with new revenue-generating services to address your clients’ new challenges. And time to keep trading when your competitors struggle as they didn’t have the foresight to build the cash reserves to see them through a financial crisis.
This time around I fear the number of casualties will be higher as many businesses have the increased cost of Covid loans to repay or they started during lockdown and have yet to build up vital cash reserves.
To read all my tips for recession-proofing your business, please view the full article “Guide to recession proofing your business.”