Many businesses are facing a lengthy period of difficult trading. Most business owners have not had to deal with tough times before and are going to have to think carefully and take appropriate measures to weather the storm. This article looks at some of the actions businesses should be taking now to maximise their chances of survival.
Accurate and timely information is needed to manage any business properly. Management information may take many forms but it is always essential that the data is relevant and tailored to the specific needs of the business. This may seem obvious but is extraordinary how many companies try to struggle on with little or no key information.
Forward looking information is often more important than historic data. The most relevant sources of information are likely to be:
Historic information does play a part in managing the business. It enables the business to assess how it has performed in the past; to look at what has and hasn’t worked. Detailed information and careful analysis is required, from which to draw sensible conclusions and on which to base corrective action. For example:
It is important to understand the profitability of each product especially where a business has multiple product lines. Some businesses find, when they carry out this exercise, that salesmen are actively selling the loss making or poor profit ranges and neglecting the most profitable. Understanding the margin on each item allows the company to consider whether to keep the product as a loss leader, increase the price or stop supplying it all together. Thought also needs to be given to the resources involved in generating sales of various different kinds, so that effort is concentrated where most volume, profit and cash can be generated.
It is also worth reviewing sales and marketing methods and to consider targeting inactive customers with special offers or other inducements. Whilst profitability is paramount, consider how the introduction of quantity discounts or early payment discounts might help. Make sure credit limits are in place for customers, review established limits and enforce them.
It is important to regularly appraise staffing level and utilisation. However, don’t forget that redundancies can cost the business cash in the short term, will take up management time and may be demotivating to the residual workforce. It might be appropriate to look at flexible working strategies where there are seasonal or irregular workflows.
Look at purchasing policies and consider renegotiating with suppliers (biggest ones first!) or seeking new tenders. Look at payment terms as part of such an exercise - they can easily get missed.
Balance Sheets are fundamental in any review process. Working capital is probably the first place to start. It is usually made up of three key elements (debtors and stock, less creditors) and represents the amount of cash tied up in the actual trading of the business. By definition, reducing working capital decreases borrowing (or increases cash). However, this needs to be balanced with efficient trading (e.g. customer lead times).
The reduction of stock usually requires a detailed exercise to be carried out. Some points to consider:
Collecting cash is important for any business, and the objective of a sale is not achieved until the cash is in the bank. Businesses need to understand what is causing delays in debtor collection.
The final element of working capital to consider is creditors. It is important to remember that the liability for a purchase usually arises when the order is placed and so procedures may need to be reviewed to ensure control is exercised over all orders.
Creditors need to be kept happy enough to ensure continuity and reliability of supply – but no more often than that!
Remember that supplier payments are a difficult part of a cash flow forecast – you can delay some payments to help you through a tough spell, but you will have to catch up later and that will hit cash.
Above all, remember that ‘Cash is King’ and that liquidity is essential for survival (just as has recently been the case for banks!). Concentrate on cash generation and retention before profitability – the establishment of a good cash reserve, and properly agreed loan facilities where necessary, will enable many a storm to be weathered and give you time to resolve problems. If you are short of cash, or dependent on an overdraft (which can be withdrawn), then a relatively small and temporary trading difficulty can quickly become much more threatening.
Review your funding position as a matter of urgency. Put term loans in place where they are more appropriate than overdrafts (i.e. where borrowing is long-term rather than for temporary fluctuations). Consider bringing in new equity if you have confidence in the business – now is not a good time to be highly-geared. It is always more difficult, if not impossible, to raise funds in times of difficulty.
The above actions are an indication of some of the things a business should consider. The specifics will depend on the business and how it operates and in what sector. To maximise cash and profits in a recession requires a good understanding of the business and how it works. This takes time and resource but the results can be significant. Secantor provide experienced FDs to work with owner managers to achieve optimum funding.