It’s time to get back to basics
Is your business currently underperforming, distressed or suffering financially?
The speed at which the current economic downturn has impacted on business has been truly remarkable. The global economy is now combating its greatest financial crisis in over 70 years…
It is also true to say that, after 15 or 16 years of running a business in economic boom conditions in Australia, the business skill sets required to run a profitable and sustainable business in this turbulent climate are very different. It’s probably no surprise therefore that the owners of many businesses are currently managing a raft of new, confronting and often challenging issues that they have not experienced before.
In our experience, it is relatively straight forward. By adopting a few simple strategies and business practices, the business can quickly get back on track.
For some, getting back to basics is difficult because they have either forgotten what happens in a recession…or they have never experienced it before!
The Warning Signs
It is important to recognise the early warning signs and acknowledge that these are perhaps symptomatic of very different ongoing trading conditions and customer purchasing habits, that are likely to persist for some time. Some of these warning signs can include:
- Poor cash flow
- Ongoing losses
- No overall business plan
- Lack of budgets, accurate forecasts and timely financial information
- Negative equity
- Legal demands
- Slow to no moving stock
- Bank facilities exhausted
- Overdue tax and employee liabilities
- A need for further borrowings
So What Should You Do?
Well, knowing where you and the business are currently “at” is the first step in making those necessary changes to return you to profitability and long term sustainability. You should enlist the help of your key employees and leaders and brainstorm how your business and importantly, your clients, are being specifically impacted by the current downturn. Some of the “getting back to basics” initiatives should include the following:
1 PLANNING
The owners need a simple, effective and immediately actionable road map to ensure they achieve their amended objectives.
2 REGULAR CASHFLOW FORECASTS
Cash is definitely “king”. The business should prepare and comprehensively understand “three scenario” forecasting on a 12 week rolling basis:
a) Best case
b) Worst case
c) Most likely outcome
These rolling forecasts should be the “headlights” for the business in steering it back to good health in the short term…they are vital in terms of decision making.
3 TURNAROUND STRATEGIES
Initiatives must be put in place to immediately improve profitability and cash flow. There are a number of things that can be done, for example:
- Review debtors’ policies and collection processes
- Review all overheads and cut costs
- Get paid sooner…sales to cash
- Drive stocks lower and faster
- Refinancing “expensive” debt
- Consider asset sales with leaseback
- Review remuneration structures
These and other important strategies are developed through the planning process. We recommend the identification of three levels of future actions and initiatives, that is “Plan a, b and c”, that can be instigated at predetermined times with varying types of actions depending on the severity of the downturn.
4 UNDERSTAND YOUR BREAK EVEN POINT AND THE THREE CONTROLLABLE “LEVERS”
Chasing sales and discounting is not necessarily the answer; “you can’t sell your way out of a recession” What you need to understand is your breakeven point and the three controllable “levers” of cost, volume and profit. You will need to understand exactly what your daily, weekly or monthly “get out” position is and how various adjustments to sales, margin and overheads impact on that position.
5 BANK RELATIONSHIP
Your relationship with your banker has never been more important than today. They need to understand fully your position. Contact your bank and work out the best way of:
- Being proactive by communicating with regular updates
- The provision of accurate and timely information
- Instil confidence, that you know what you are doing…
and take any pre-emptive action out of their hands!
6 KNOW YOUR CUSTOMERS’ CUSTOMERS!
It is vital in a downturn to understand how your clients are being affected by things like the changing purchasing habits of their clients. Do some analysis here around their industry, sector and demographics and you can more than likely determine how you will be impacted.
7 KNOW YOUR NUMBERS
It’s a fact…you cannot run your business out of a profit and loss statement produced three weeks after the event! What you need are quick, accurate and regular indicators. Get close to and own a deep understanding of timely financial management information, KPI’s and numbers…it is crucial you make informed, timely and effective decisions.
The above is really only a snapshot of what is required…effective planning will draw out the required strategies. What is important, is to take action now…it will not happen by itself!
What’s the first step?
There are many, many other important actions and initiatives you should be taking, and some of these are outlined above. However, ultimately the best way to identify the critical actions and ensure they are prioritised and addressed is to prepare a plan…importantly with people that understand your issues. By utilising the expertise of experienced business owner specialists you will be ensuring a successful outcome.
Fordham is Australia’s leading business owner specialist advisory firm…we understand the issues that business owners face, particularly in times like these. We have worked through changing economic cycles and volatility many times before and understand the key operational and strategic solutions for doing business in uncertain and difficult times. Ask us about the owner specific tools we have developed to assist you, including our Business Owner Diagnostic, our Profit Improvement Analyser and our “Doing Business in Turbulent Times” Guide.
If you would like to learn more about how Fordham can help you and your business in these uncertain times, then please contact us on 9611 6611 or email us at info@fordhamgroup.com.au.