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Managing through an economic downturn

Managing through an economic downturn

Local insight.

With the economy continuing to slow, many businesses are now experiencing tough times. Some managers are beginning to ask the question, ‘what can I do to make sure my business survives?’.

There are a number of factors that can affect a business’ ability to survive a downturn. Perhaps the most critical is cashflow. The money being paid to the business by its customers must be the main source of funding; otherwise you are simply financing your customers’ businesses rather than your own.

It can be difficult to chase customers for payment, particularly if you are worried about upsetting them. But if customers are having difficulty meeting payments, and you are unable to also stretch your suppliers, then tough decisions need to be made as to whether there are alternative sales channels.

If the debtors’ ledger shows that customers are increasingly outside their agreed trading terms, management needs to take steps to correct the position and prevent bad debts. Other strategies include:

• Offering discounts for prompt payment; • Giving particular segments of customers different or tighter trading terms such as stopping supply or requiring C.O.D until the account is brought into line; • Focusing on customers with good credit history; • Using retention of title clauses.

In addition, there may be other areas that can improve working capital and help manage overheads, such as:

Suppliers

Businesses may be able to take advantage of their relationships with suppliers to generate revenue, or create funding. For instance:

• Negotiate favourable credit terms with suppliers (or switch to one that provides them); • Ask for discounts on upfront payment; • Reduce the number of suppliers to reduce administration costs.

Inventory

A more streamlined and efficient inventory system could offer cost and time efficiencies.

Consider:

• More, or less, frequent ordering of inventories to smooth out payment requirements; • Obsolete or slow moving stock to be rationalised and converted to cash; • Sales to be focused towards faster moving items.


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