Priorities for business survival

Priorities for business survival

Barry Talor's local insight

Barry Taylor is a partner with accountants and business and financial advisers HLB Mann Judd Sydney.

As the bad economic news continues in 2009, many business owners and managers are worrying about whether their business will survive to see 2010.

It is true some businesses will struggle to make it through. However, many times when I have been called to put a business into liquidation, that organisation could easily have survived if those responsible had made sensible decisions earlier, and avoided basic mistakes.

Five top priorities for business survival in diffi cult trading times are:

1. Cash is king

This is true regardless of trading conditions, but takes on greater emphasis in difficult circumstances such as the current global markets.

There are essentially three elements to working capital management: Inventory; receivables (which absorb cash); and payables (the source of cash or financing). Managing all three effectively is key to business survival.

2. Manage receivables

The challenge for businesses is to collect from debtors as fast as possible and to mitigate against the incidence of bad debts. In the current economic climate, it may be appropriate to consider the use of discounts and allowances as a means of increasing short-term sales activity; clearing out-of-date stock; rewarding good customers; and encouraging prompt payment of account.

Businesses may also review practices with invoicing credit sales. For example, traditionally a business may have issued invoices and statements at seven days from month end. This process may be changed to issue invoices with dispatch of goods or to adopt invoicing mid month and month end as a means of encouraging prompt payment of invoices. Existing credit policies should also be reviewed to ensure that there are appropriate policies for:

    Setting credit limits Communicating trade terms to both staff and customers Conducting reference checks for new customers Introducing penalties for late or delinquent accounts Monitoring aged receivables to avoid debts becoming too old or too large.

3. Preserve cash

Other considerations for business proprietors to strengthen balance sheets include:

    Reducing drawings or dividends to owners Selling non-core assets Using surplus cash to reduce debt Limiting discretionary and nonessential expenditure.

4. Basic management

Challenging times mean that the basics must be covered off properly. Business managers should ensure information systems are properly maintained and that management information is obtained and analysed on a regular basis. Regularly review records such as the operating budget and cashfl ow forecast, and conduct sensitivity analysis of budget forecast for sales levels and gross margins.

It’s also useful to take the time to re-evaluate business costs and supply relationships. Consider the opportunities of outsourcing certain functions and creating a more flexible work force through part-time work. However, identify key staff that the business cannot afford to lose, and reward them appropriately.

5. Stick to the knitting

Finally, concentrate on what the business does best. Take the opportunity to re-evaluate the product and service offerings and excise any lines that are loss-making or have questionable contribution margins. Re-evaluate research and development projects and capital expenditure programs in terms of risk and funding. Most importantly, don’t leave any diffi cult decisions until there is no way forward. Involve advisers in survival planning from the outset to help the business navigate the diffi cult times.

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