Managing through an economic downturn
- 27 August, 2008 11:45
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:
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.
A more streamlined and efficient inventory system could offer cost and time efficiencies.
• 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.
A business that is able to accurately forecast its cash requirements will have greater management flexibility when decisions are being made that require financing. For example:
• Capital expenditure can be deferred until adequate cash resources are available; • Discretionary spending can be identified, deferred or frozen; • Facility limits may be reduced, saving on line-fees and/or interest.
Business managers and owners should keep in constant communication with suppliers to help understand how their business is travelling. Develop a contingency plan for key suppliers on how to obtain supply of goods or services should that supplier fail. Do the changed trading circumstances offer alternative suppliers at better rates?
While every business is different, they can all benefit from a critical look at their cashflow cycle. When lenders make financing decisions in the current credit environment, they are placing a greater emphasis on a business’ ability to manage their cashflow effectively. When new finance is required, a business will find that lenders are more receptive to proposals that demonstrate robust business plans and forecasts.
Andrew Needham is a director in the business recovery division of accountants and business advisers, HLB Mann Judd Sydney. email@example.com