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CREDIT CRISIS AND RECESSION
CREDIT CRISIS AND RECESSION

Another reminder of the importance of business planning


Link to  Printable Version

The current credit crisis and threat of recession is just another reminder of the importance of business planning and having a sound strategy to navigate your business through turbulent times.

The last economic downturn in Australia saw 75,000 businesses disappear and while a recession poses major challenges it also creates opportunity for smart small business owners who plan, measure and monitor their business performance.

We pride ourselves on the fact that we are not your average accounting firm who just ‘keeps the score'. Our role is to help you grow your business, its profits and value, plus protect your assets at the same time.

To obtain bank finance you need to plan ahead and prepare budgets and cashflow forecasts.  Attached is a ‘Business Financial Health Check' questionnaire that is designed to illustrate the habits of successful business owners. Don't hesitate to contact us for guidance so that you make informed financial decisions regarding the future of your business.

In the meantime, below are some tips to help you assess your current financial situation and review your business plan to face the current economic challenges.

1. Don't Panic

It's difficult to make sound decisions if you do. To get a better sense of where you stand, begin by reviewing your cash position and anticipated future cash needs. Are they in line with your  business's short-term needs, goals, and risk tolerance?

 

2.  Cashflow

What are your cash-flow needs for the next 30, 60, 90, 120 and 180 days?  Do you have sufficient cash reserves; check with your lenders on the status of your credit lines. Are you complying with their terms? Will the bank renew the commitments at similar rates and on the same terms?

 

3. Compare your Budgeted Income and Expenses to Actual

Take a fresh look at your monthly income and expenses. Have you been meeting your budgeted projections? How much of a drop in revenue can your business withstand and for how long?

 

4. Reduce Spending

Review every area where you spend money and look at options to save such as relocating to smaller or cheaper premises, sub-let part of the building, seek alternative and possible cheaper suppliers, etc. Can you reduce discretionary spending in any areas to relieve the pressure on your cash-flow needs? Eliminate your reliance on credit by disciplining your spending. Communicate to staff/team members about the need to tighten spending.

 

5. Reduce Debtors

Chase up all outstanding debtors and stop credit to those outside your terms of trade. Send out invoices immediately the work is performed with a due date for payment rather than terms of 30 or 60 days on the invoice. Ensure all statements go out on time and follow up on outstanding accounts. Review your largest accounts to determine whether a credit squeeze or an economic slowdown will affect their ability to pay you. Remember, one bad debt can bring your business to its knees. Keep receivables ageing current and watch for new patterns of slow payments and follow up immediately.

 

6. Utilize Credit from Suppliers to the Maximum

This is mostly a form of ‘free finance' unless they charge interest, so ensure that they are not paid before absolutely necessary. If your credit lines are frozen or at their maximum limits, consider meeting with vendors and working out a schedule of partial payments that would allow continued delivery of critical materials and supplies. Forfeiting discounts for early payments may be more advantageous in preserving cash for critical items. Keep payables ageing current at all times because that's an important tool for managing cash.

No one is immune from a downturn and what happens if your biggest supplier falls over? Explore other suppliers who may be discounting to counter their decline in sales (a dangerous strategy) but you might benefit from cheaper prices or longer credit terms.

 

7. Alternative Financing

There may be cheaper forms of finance other than high interest credit cards. You may also be able to negotiate a lower interest rate or extend terms to reduce repayments. If you have an outstanding ATO debt you might be able to negotiate a repayment plan provided you can meet current obligations.

 

8. Reduce Stock on Hand and Work In Progress

If you are a manufacturer or retailer, review inventory management practices. Are there opportunities to reduce your on-hand inventory? Service companies should make sure they're capturing all their billable hours and invoice promptly. Have you billed all your contractual items? How about all your pass-through expenses and disbursements?

 

9. Consider Increasing Prices

Consider ways to pass on your increased costs for fuel and materials to your customers. You need to understand your break even point in this exercise and consult with us regarding pricing sensitivity analysis.

 

10. Consider the Safety of Your Investments

Speak with your financial planner (or ask us if you don't have one) about any changes that may be needed to help protect your assets and investments from any unforeseen disaster. Don't engage in panic selling of your investments. Make sure your portfolio is diversified and in accordance with your risk tolerance.

 

11. Create an Action Plan

Come up with a plan NOW to respond to a future decline in revenues, before they actually occur. Re-Think your business strategies and update projections. Review your product/service lines to identify the most profitable items.

 

12. Marketing

Regularly contact your good customers. Generally 20% of your customers generate 80% of your revenue and even casual discussions can lead to new business opportunities. Thank clients for referrals and look at increasing the number of times a client comes back with loyalty incentives, good service, etc. Increase the average sale with up-selling and cross selling techniques, plus reward staff for achieving targets.

 

13. Insurance

Review all insurances, particularly any from companies with weak balance sheets. Be careful not to surrender a policy, as securing new coverage might require underwriting that can affect your coverage.

 

14. Staffing

Calm your employees' fears about how the crisis will affect the business and their jobs. Speculation and gossip are counter productive, so it's better to address their concerns directly. Remove any deadwood from the payroll and ensure that you keep the best employees. Be prepared to sub-contract if a cheaper alternative is available and make sure all employees are involved in improving business processes that create efficiencies.

 

Finally, remember that:

  • Small businesses have greater flexibility and can more easily adjust to changes in the economy than their larger counterparts.
  • Small business owners can use the crisis as an opportunity to buckle down, refocus, assess and make their business more financially sound, disciplined and less reliant on credit.
  • During tough times, it's important to maintain communication with your Accountant and cashflow planning is absolutely essential. Planning lets you measure and monitor plus identify any early warning signs.

We understand your business and the challenges you face and want to work with you to make sure your business not only survives during this downturn but actually thrives.

Contact us today for advice on how we can help you through these testing times.

AUBREY PATON & ASSOCIATES

George Psiakis and John Clarke

Link to  Business Financial Health Check 



13th-April-2009