Many business failures are caused by poor financial management and record keeping. The time frame is normally 3 – 5 years when failure happens.
This is definitely avoidable through better financial management. Here are ten ways in which you can survive the tough year ahead through better financial management:
Limit your capital expenditure
It is very easy to over-extend in a weak economy. One can safely say that when a business expands, for example by opening up a new branch, the owner will underestimate the operational difficulty and the cost. When that happens in an economic slump, the results can be fatal. The danger is even higher if you extend into unfamiliar markets or industries. As a general rule, don’t try to expand during an economic downturn.
Many opportunities open up during a downturn. One of these is because many of your competitors may run into trouble. The general rule cannot be absolute, and carefully considered expansive moves always have a place in your strategy. The word here is be very careful.
Don’t cut back on marketing
The first thing that business owners tend to cut back on in times of trouble is marketing, because the results of a business’s marketing effort is less immediate and tangible than, say, production. It therefore seems that a business can do without it for a while. This is a mistake. Keeping the company visible is paramount when business is slow. It is advisable, when times get tough, to increase its visibility in the market. These efforts do not have to be expensive.
By all means stop spending on wasteful marketing projects. But your focus on your business’s marketing must become sharper, and you and your team must increase your time and energy on marketing. A good place to place the focus of your marketing effort is with your existing clients. Expand your offer to them. Is there something you can sell them over and above their usual purchase?
Do not just cut at will, but scrutinise each project by comparing the current marketing projects and their return on investment for each project. Example: if you are advertising in local media and the customers gained is more than your investment (past or ongoing) then keep that project going. If it is not covering the investment, look at why and either change it or cut it completely. Remember to look at your competitors and see if their advertising is working to see where you might gain.
Learn about financial management
You don’t have to be an accountant or be trained as a financial director. I assure you it is not as complicated as it seems. The most successful business owners know their shortcomings and hire financial experts. As owner-manager, you must be able to understand and use the main outputs of a good financial management system.
For example, do you know what the current assets/ liabilities ratio of your business is? What should it be? Do you know your debtors turnover, your creditors’ turnover and your stock turnover? Do you have targets set up for these?
If you don’t, it is time to learn the basics. Do a course, read a book or sit down with your accountant or auditor for some learning sessions. There are excellent online colleges that are completely free so you have nothing to lose!
Review your debtor management system
Here is a quick checklist to ensure that your business has robust systems to allow you to sell on credit and survive a downturn. Do you have an efficient:
- Debtor (customer) review system? (before you bring them into your business – not all customers are good)
- Credit policy – rules of who gets how big a credit limit? You may want to scrap giving credit limits to new clients until they have a good payment record with you.
- Proper records of your debtors and their activities?
- A monitoring system to ensure that debtors remain within their terms?
Review your creditors (suppliers)
Remember that times are tough for your creditors too. This means that some are going to clamp down on any further credit, but some may be willing to give you better terms because they need your business. Renegotiate and review your terms.
Relationships are crucial in tough times. Nothing builds relationships like keeping your promises and being proactive with communication with your creditors about any payment delays. A creditor age analysis is a must as part of the financial management documents that you routinely consult to gauge the health of your business.
Stock Levels
Stock is tied-up cash, and in tough times you need to free up as much cash as possible. Keep the minimum stock levels you can get by with. It will require that you know the stock turnover for all your lines so that you can focus on getting rid of your slow-moving stock, even negotiating to return it or replacing it with faster-moving items.
You will not survive if you do not have a robust stock recording system. And rather keep the keys of the stock room yourself.
Manage your bank account
A core feature of your credit record is how you manage your bank account. Stick to your limits and arrangements with the bank, bank all your cash so that your account reflects the true size of your turnover, and be pro-active when you see trouble brewing. Let the bank know if any arrangement can’t be met. This goes for any entity you may have an agreement with.
Improve your invoicing
A good invoicing system will ensure that your invoices are sent out on time, and has built-in mechanisms to make sure invoices are paid on time. If they are not – follow up. There are a few solid invoicing systems out there but it is always best to have your invoicing as part of your accounting system. These can send recurring invoices automatically and have useful features that allow you more time to focus on other things
Sell unproductive assets
Let go of any emotional attachment to old, unproductive assets or pet projects that didn’t work out. Sell them and use the cash – and space – more productively. If you have not used them in 6 months or you are not planning to use them in the next 6 months – off to the garbage can or sell them.
Have a plan
Every business owner has a plan, some in their heads, some scribbled down on random notes, and some in more formal formats. Somehow, the most successful business owners are those whose plans:
- Include detailed cash-flow forecasts
- Are routinely updated – once a month at least
- Are routinely used, studied and referred to.
Contact us if you have any questions or queries.