Recession Proof Your Business
Just as evolution in animals dictates that only the fittest survive, in
a recession it is generally survival of the smartest.
In this country we seem to have a recession-like economy happening every
seven to nine years and almost 75,000 Australian businesses were wiped out
in the last downturn.
To survive business owners
must find a way to plan their way past potential threats including higher
interest rates and fuel prices plus declining consumer confidence.
In recessionary times business owners must strike a delicate
balance between pessimism and optimism, ensuring expectations are realistic
but not giving up on growth. Smart business owners know that a recession
presents an opportunity and it's time to spend more time working ON your
business rather than IN it
In good times the weaknesses in a business can be hidden
but when the going gets tough, both the strengths and weaknesses will
surface. Problems emerge when bad financial management habits spill over
into tougher economic times.
As your accountant our role includes identifying those weaknesses and
helping you amend the strategic direction of the business. We combine
the knowledge of your business with our experience and some 'intelligent'
forensic software tools to detect the early warning signs and then work
with you to develop strategies to move forward
Don't sit idle with a wait and see mindset in the event
of a downturn. Be pro-active and try and recession proof your business
by driving increased productivity and growth using these ideas. There
is no magic bullet to recession proofing your business but we have compiled
a list of 10 strategies in a bid to help grow and protect our clients
because ... Small Business is Our Passion.
1. Improve the Quality of Your Financial Records
2. Failing to Plan is Preparing to Fail
3. Unlock The Hidden Cashflow
1. Improve the Quality
of Your Financial Records
In boom times it's very easy for business owners to ignore
the quality of their financial reporting system and turn a blind eye to
financial management issues. Unfortunately when these bad habits spill
over in to difficult economic times it can have catastrophic consequences.
The most basic requirement for a successful small business
is good accounting records. Up to date, accurate financial records lets
you make informed business decisions. They provide vital management information
needed to grow your business and monitor key performance indicators.
Despite the introduction of GST some 8 years ago, the majority
of small business owners are still using accounting software beyond their
business needs and level of accounting skill. The net result is they generally
produce 'computerised shoebox' records that should not be relied upon
when making financial or strategic business decisions.
If you don't understand double entry accounting principles
including debits and credits, it is time to review your accounting software.
As a rule of thumb, you should have financials available within 7 days
of the end of each month. This is supported by an Australian survey that
suggests that a business' very survival depends largely on timely and
You will also need good accounting records to demonstrate your financial
position to banks, other lenders and prospective buyers at some time in
the future. These parties will want to track your historical performance
and will demand current data. The Tax Office also requires you to keep
and maintain business records including source documents for at least
Well managed businesses produce a 'weekly snapshot report' of:
Debtors & Creditors
Cash at Bank and On Hand
Work In Progress
2. Failing to Plan
is Preparing to Fail
Historical data is important but you'll 'crash' the business
if you drive it by just looking in the rear view mirror. Today's decisions
will impact on your future results.
If you don't have a plan in place or prepare an annual budget
or you are asking for trouble when the economy turns south. It's easy
to get complacent during the good years but a budget creates a blueprint
for the future that you can measure your actual performance against.
Cash flow is usually the most common client concern, the
most visible and therefore the most painful. By identifying all the activities
that turn work into cash and then measuring those activities, the results
can be immediate.
A budget can identify if and when you expect to need additional
finance. While generally we prepare budgets at the start of each financial
year, your budget is always a work in progress under constant review.
The banks are tightening their credit policy in the wake of the sub-prime
lending crisis and planning the finance application is absolutely critical.
Cash is more often than not the reason why so many businesses
fail. Profits can't be spent until they are collected. It is obviously
important to sell at the right price to maximise your gross and net profit
but if you don't focus on collection, the business won't last very long.
A positive cash flow is an absolute necessity if your business
is to succeed and it just doesn't happen - it needs to be planned. That's
why we strongly recommend the preparation of a 12 month cash flow budget.
In fact, any business that fails to accurately forecast its cash flow
is on a collision course because without realistic cash flow projections,
management is unable to identify future cash shortages.
The cash flow budget is based on a number of assumptions
regarding the expected future performance of the business. The assumptions
must be realistic and supported by research, available data plus known
facts such as rentals or forward contracts.
The information in your cash flow budget is designed to:
forecast your likely cash position at the end of each month
identify any fluctuations that may lead to potential cash shortages
plan your various taxation payments
schedule any major capital expenditure, and
provide prospective lenders with key financial information including
After you have completed your cash flow budget and you're
confident that it actually reflects your predicted position, you should
be able to identify if you're likely to need an injection of funds to
support the business.
Careful planning might let you restructure the timing of
certain payments to prevent the cash shortfall occurring or you may need
to have finance facilities in place. Being a financial tool, accuracy
is important but this can be difficult with forecasting.
We can assist you with the preparation of your cashflow
budget using computerised spreadsheets that allow us to produce forecasts
based on a number of 'what if' scenarios.
If you would like a copy of an 'electronic cashflow
worksheet' please contact our office. Our preferred accounting software
program, Cashflow Manager can generate a budget using historical data
at the click of a button. We can then monitor variances on a monthly or
3. Unlock The Hidden Cashflow
If changing economic conditions are going to put a squeeze
on your business, the first place you will see the signs is in the cashflow
Of course, positive cash flow alone is not enough. The business
must be returning a profit and the long term trend for both must be positive.
You will not only need to make sure your business is profitable,
you also need to make sure you have enough cash available at the right
time to pay all the bills. In particular, you must be able to pay your
suppliers, staff and meet your tax liabilities.
If you do a quick estimate of how much money you have tied
up in debtors, suppliers paid too quickly, excess or slow moving stock
and work not invoiced you might find it's worth investing some time to
address these four areas. It might put some funds back into your account
and reduce your interest bill if you run an overdraft.
There are many places your cash can be hidden other than
in your bank account:
Debtors - unpaid customer accounts.
Do your statements go out on time?
Are you monitoring the customers who don't pay within your terms?
Consider printing the actual due date on your invoices rather than the
standard 30 or 60 days.
Follow up delinquents.
Remember, the 'squeaky wheel always get attention'.
You are not in the business of 'bank rolling' other businesses or customers.
Suppliers might be paid too quickly.
As you know, the supplier who rings and annoys you for payment often gets
paid first when they shouldn't.
Worse still, the part time bookkeeper that pays bills the moment they
Take advantage of available credit terms and even re-negotiate better
terms if you can.
Investigate alternative suppliers and explore their prices and terms.
Keep your suppliers on their toes and make sure your suppliers earn your
3. Work in
Progress can be a real hiding place for cash.
If you have multiple jobs on the go at once it can be difficult to manage
and get them to the point of invoicing.
There can be all kinds of delays from slow delivery of parts, labour issues,
getting access to job sites etc.
Computerise your stock tracking to avoid big cash flow headaches.
Stock is really cash piled up in your store room.
Do you have any methodology behind your stock purchasing?
Many businesses buy when the sales rep calls or if they are offered a
You should only buy stock when it suits you, not your supplier.
The objective for any business is to have stock on the shelf ready for
sale for the shortest possible time.
Stock is money because it absorbs precious working capital that could
be used for the other things.
If you have borrowings in your business, excess stock could be costing
Vital to this objective is to know the sales cycle of your products, i.e.
how long does it take from when the goods arrive into stock until when
they are sold. You may have historical data upon which to calculate the
sales cycle. If not, you need a way to calculate how long goods are sitting
in stock so that you can minimize the length of time and maximize your
available working capital. This is called 'Stock Days' and is an average
of all stock lines. One way to calculate 'Stock Days' by using your financial
reports is as follows:
Stock on Hand ÷ Cost of Goods x Time Period = Stock
Stock on Hand means the dollar value of stock on hand at
a given date, e.g. June 30
Cost of Goods means the direct costs of getting the goods
ready for sale, including purchase of the goods, freight inwards, store
costs (but not fixed overheads like administration wages or advertising)
Time Period is the reporting period upon which you are basing the above
A business with $150,000 in stock at June 30 and Cost of
Goods for the year of $400,000 has 'Stock Days' of 137 i.e. $150,000 ÷
$400,000 x 365 = 137.
This means that, on average, stock in this business takes 137 days from
when it arrives until it is sold. Once you know this number you are then
in a position to manage the situation and work on shortening the cycle.
Again, a good stock control and record keeping system is
required that tells you the following:
What is selling
What isn't selling
What the slow moving items are
What has become obsolete
What the trends/seasonal patterns are
What your margins are on items; and
What it is costing to store stock.
o You can determine your minimum and maximum stock level
requirement for various items lines.
o This makes it much easier for staff to know what, how much, and when
o Obsolete stock can be a real 'hiding place' for
cash. It's tough to sell items at a loss, but if they are going to sit
there forever, you may as well turn them into working capital to spend
on better selling items. If you have good records you are also in a position
to know how much you are purchasing from suppliers. This puts you in a
better bargaining position when it's time to renegotiate prices and terms.