Clements Dunne & Bell Melbourne

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7 Key Issues for Business Success in Tough Economic Conditions

Recent statistics are showing an increase in business failures and a fall in consumer and business confidence.  Meanwhile, the investment markets are taking a battering.  In short, business and economic conditions are currently very tough and it is increasingly looking like the return to prosperity will take longer than first thought by the pundits.

This is especially the case for those businesses that are not exposed to the resources sector and who are feeling the brunt of the “two speed economy”.
 
In these current conditions, businesses need to be proactive in order to survive and prosper.
 
The following are some brief notes on the 7 key issues for businesses to focus on.

1.    Manage invoicing & receivables

You need to raise an invoice before you get paid.  It’s alarmingly simple, but all too often businesses do not have reliable systems in place to ensure that they are invoicing on a timely basis. 

This means that there can be an extended period of time between providing the product/service and getting paid and this can be a very heavy burden for business cash flow.
 
To add insult to injury, businesses who struggle with invoicing also experience difficulties in collecting payments on time.  This will generally be as a result of inadequate follow up and vetting of new customers/clients.

We firmly believe that every business should have robust invoicing and receivables systems to support cash flow.  The basics of such a system should include:

  • Clear and agreed trading terms with clients/customers that establish the deliverables, the price and the payment terms;
  • Due diligence procedures for new customers to ensure that they can and are willing to pay invoices on time;
  • Regular and accurate client/customer invoicing procedures; and
  • A documented and disciplined process of following up payment of invoices.

Where a business is experiencing a significant increase in late payment of invoices, corrective action should be taken at the earliest possible time.  There are a number of options available and we would be pleased to discuss these in more detail on a case by case basis.

2.    Keep an eye on the bank balance

Cash flow is the life-blood of a business and there are far too many examples of businesses that have gone bust making a profit because they were unable to manage cash flow.

The aim of the game is to make sure that there are funds available to pay all commitments as and when they fall due.

To this end, a business should be forecasting its cash flow in order to understand the position, to plan cash flows and to proactively address any issues before they become serious problems.

These cash flow projections should be regularly updated to take into account new information and to ensure that they are as accurate as possible.

We have a number of tools that can assist business in projecting cash flow and encourage businesses to contact our office to discuss how they can better project cash flows.
 
The second element of managing cash flow is to ensure that the business has access to sufficient working capital to cover any tight spots.  This can be achieved by reserving surplus cash, arranging debt facilities and/or arranging for the owners to provide additional funding.

We strongly recommend that contingency arrangements be put in place early as it can often be very difficult to raise additional working capital quickly when faced with an imminent cash flow crisis.

3.    Watch the bottom line

In the current environment there is widespread discounting and businesses are under a lot of pressure to squeeze their margins to win sales.
 
Although this can be the right strategy in certain circumstances, it often leads to significantly reduced profitability and this in turn can send a business into a downward cash flow spiral.

To prosper in the current environment, business must guard their profitability.
 
The first step is to know your break-even point.  This is the level of revenue required to cover both the fixed and variable costs of producing that revenue.  It is the revenue required to cover the costs of opening the doors each day.

The break-even point will differ if the approach to pricing changes.  As such, a business can model several break-even scenarios using different pricing to understand the impact of each driver – volume, pricing & costs.

For example, in a business where gross margin is running at 40% and overheads at 30%, a 5% increase in price and volume, and a 5% decrease in costs will generate an increase in profit of 119%.
 
This is powerful knowledge as it allows a business to set appropriate targets/budgets.  It also gives a business the power to identify when and by how much prices can be discounted.

Beyond this, business should be using their accounting system to monitor and control profit margins to ensure that they are in line with the assumptions used in the break-even calculation and to maximise profitability.  This can include setting a performance budget.

Off the shelf accounting packages have powerful features that can be utilised not only for reporting, but to better manage the business.  We often see the capabilities of these packages being under utilised to the detriment of the business. 

Lastly, businesses should review pricing and this should include benchmarking with the competition.

This will highlight where prices should be increased.  It will also highlight where prices cannot be increased.  If prices cannot be increased, the business should look at reengineering the product/service so that it can be delivered at a lower cost to increase the profit margin.

For further information on break-even calculations, accounting package capabilities, budgeting and benchmarking, please contact our office.

4.    Austerity measures

When business conditions are tough, belts need to be tightened. Time to undertake a cost cutting review.

The temptation is to cut costs wherever the business is able to “get by” without that particular item.  We caution business on taking this approach as the short term gain is often accompanied by long term pain.

A better approach to cost cutting is to consider the value of the item under consideration and to cut those items of lower value to the business first.  This approach will safeguard a business’ competitive advantage(s) and is not damaging to long term success.

5.    Get on the front foot

Successful businesses know that sales do not make themselves. When conditions are tough and there a fewer buyers around, business need to ramp up their efforts to attract buyers.  

This does not mean spending a lot of money on advertising or running big discounts.  It means getting smarter at connecting with prospects and getting better at converting them to paying customers/clients.

Success is often more about an understanding and response to the customer/client and their motivations, and less about things like price.

A well considered marketing plan is a must and should include consideration of e-marketing and social networking strategies.  Seeking assistance from a marketing consultant in developing and implementing a marketing plan can be money well spent.

6.    Failing to plan is planning to fail

It’s been said before and we will say it again.  Every business should have a written business plan.

This is the road map to help the business reach the destination that is envisaged by the owner(s).

If you don’t have a business plan, prepare one today.  If you already have one, dust it off and make sure that it takes into account the current climate.

For those who do not have the time to go through a comprehensive business planning process, we recommend preparing a “one page plan(s)” (OPP).

The planning process should also encompass a risk review and risk management and mitigation strategies.  

If you need assistance with business planning, including business plan and OPP templates, please do not hesitate to contact our office.  We are also available to assist in conducting risk reviews and development of a risk management process.

7.    You got to know when to hold ‘em, know when to fold ‘em……

In medicine, most conditions are treatable.  However, if left untreated for too long, can lead to severe illness or even death.  So too in business.

If experiencing difficulties, assistance should be called in at the earliest possible time.  In this way, there can be a diagnosis and a course of treatment prescribed before the issues become insurmountable.

Seek to identify under-performing divisions, products and team members then develop and implement a strategy to rectify the situation.

We believe that for a business to be healthy and prosper, it needs to have adequate focus on each of the above issues.  Although this is especially the case in a tough economic climate, it is important to maintain the vigilance when the good times return.

As always, if you would like to discuss any matter raised in this newsletter, please do not hesitate to contact your usual CDB advisor.


 

 



 

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Daniel Clements
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Paul Clements
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T: + 61 3 8618 2222