Now that the UK is officially in recession many businesses are facing a lengthy period of difficult trading. Many business owners have not had to deal with such tough times before and are going to have to think carefully and take appropriate measures to weather the storm ahead. This article looks at some of the actions businesses should be taking now to maximise their chances of survival.
Information
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:
- Forward order book and/or sales prospects. This needs to be reviewed frequently and action taken where necessary. What can be done to promote more orders? Can volume discounts be introduced, special offers etc? Are cuts in the workforce required, or reduced working? Can overtime be reduced?
- An integrated 12 month forecast including detailed P&L, balance sheet and cashflow.This will give the business a view of what the next 12 months will look like and how much cash it will need. It should be produced on the most likely scenario basis, together with sensitivity analysis, for example looking at the cash implications of a rise or fall in sales.. The forecast should be compared monthly against actual results, with variances identified and explained, and the forecast revised as necessary.
- 13 week rolling cash forecast. This should be detailed. It will give a view of short- term cash requirements and can act as a tool for managing cash on a daily basis. This is essential if the business is tight for cash.
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:
- Analysing profitability by individual product lines, sales channels, customers or types of business. This often produces many surprises but can help the business identify areas where effort and resources are being used ineffectively. Informed action can then be taken.
- Looking at individual cost lines to reduce overheads.
- Key Performance Indicators (KPIs) can be extremely helpful in managing a business. In a conventional training business, for example, a KPI may be the number of training days sold or the number of people trained in a month.
Actions
We recommend that businesses review these suggestions. Some of them may look like just common sense or general housekeeping. But in a recession it will be the sensibly organised and tidy businesses that survive.
Sales
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 (human, cash, effort) 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 making sure the sales are profitable, 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.
Costs
Reviewing staffing levels is essential. You cannot afford to continue to employ people who are not making a real contribution. 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.
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 Sheet
Balance Sheets are fundamental in any review process. Working capital is probably the first place to start. It is made up of three elements (debtors and stock, less creditors) and represents the amount of cash tied up in the actual trading of the business. Minimising working capital also reduces cash tied up in the business.
Stock
The reduction of stock usually requires a detailed exercise to be carried out. Some points to consider:
- Can stock levels be reduced in particular areas? Check stock turn.
- Can obsolete stock be sold or used, perhaps by heavy discounting? Selling obsolete stock may generate a book loss, but this is only accounting recognition of the fact that it’s not worth much. It is probably much more important to release the cash tied up in it.
- Can the product range be rationalised?
Debtors
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.
- Are payment terms properly negotiated with customers, and enforced?
- Are inaccurate invoices a problem, giving customers an excuse not to pay?
- Does the timing of issue of invoices mean that they miss a customer payment run?
- Is the credit control function effective and well-managed?
- Beware customers who have not used you for a while. It could be they can’t get credit from their usual supplier.
- Are customers telephoned before a payment is due to check it has been scheduled and to allow any problems to be resolved?
- Are any retentions being collected?
Creditors
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 than that!
- Ensure that favourable payment terms are a central part of negotiations with suppliers.
- On large sales contracts, try to align payment terms to suppliers with those from the customer.
- Ensure invoices are thoroughly checked.
- Try to establish a routine for payment of major suppliers so they are paid consistently – just as your customers pay you!
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.
Cash and funding
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. Remember that it will be almost impossible, in the current climate, to raise funds externally when you’re in trouble, however temporary.
Finally
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 companies on a project basis to assist with such exercises.
