Owning and operating your own small business can be a rewarding experience. However, in the present environment, you’re faced with challenges such as decreasing margins to win work from competitors, pressure to pay debts and increasing operating costs. Even with consumer confidence slowly returning and revenue beginning to increase, now is the time to ensure your business has all the right strategies in place to survive the next financial crisis.
1. Reject unprofitable work
In the frantic race to win work from their competitors, many businesses discount their quotes, sometimes below cost. This may result in a successful tender, but there are hidden costs in many projects that ultimately make the work unprofitable. Some of these hidden costs include:
- Unforeseeable design changes or redrafts for plans;
- Timetable delays;
- Rectification work due to problems or issues that arise;
- Failure to allow for administrative overhead costs in quotes;
- Additional management time being devoted to project;
- Suppliers costs exceeding budget;
- Labour costs increasing due to additional staff needs or pay rises not factored into quotes;
- Site Management, including environmental issues; and
- Lack of skills or experience increasing costs.
Taking on work that you are not equipped to handle is the downfall of many businesses. It is often too late to revise your tender and recoup these costs once you have commenced work. When calculating your quote it is important to factor in all foreseeable costs and include an allowance for cost overruns as a buffer. This approach may result in you missing out on some tenders, but it is better than losing money on a job. Businesses should focus on winning tenders based on their reputation for quality, timeliness, value for money and specialist expertise.
2. Revise margins to include overhead costs
When calculating the costs of a product or manufactured goods, include an allowance for administrative overheads like wages, rent, leases, electricity, phone, fuel and other operating costs. That way you will ensure these costs are being met for each product that’s sold.
3. Use a rolling 12-week cash flow
It is difficult for many businesses to forecast their income and expenditure for any period beyond the next three months. Market conditions, customer demand, seasonal fluctuations like Christmas and Easter, all impact on sales and costs in a business. However, sales trends or market fads tend to continue for at least a few weeks or months. A rolling cashflow works by asking you to forecast your income and expenses over the next 12 weeks, using your current forecast customer receipts and current supplier bills and obligations. These are typically easy to establish and are often based on a detailed analysis of your aged debtors or creditors ledgers. With each new week you add another week to the forecast based on analysing the due dates of your customer receipts and supplier commitments. This will provide you with a very clear understanding of your income and expenditure and will allow you to compare the actual results achieved against your forecast and improve your estimates for the following week. Managing the timing of customer receipts and supplier payments is critical to managing your cashflow.
4. Use debtor insurance and debtor finance
Like insurance for your fixed assets, debtor insurance gives you piece of mind, by paying accounts when a customer fails to pay. Debtor finance is a cashflow tool that accelerates the income of slow paying customers. Instead of waiting 90, 120 or 180 days for a customer to pay, you receive typically 80 percent immediately. Debtor financing quickly coverts your debtors into cash, allowing you to pay bills on time.
5. Sell the right products
Holding product lines that are slow moving or obsolete is very costly and ties up cash while products remain on the shelf. If a product is only ordered once a month, then consider placing the item on back order for a customer. A simple way to generate cash is selling obsolete stock at a heavily discounted rate. Sales of this nature draw in customers who hopefully also buy other items whilst in store.
6. Ensure correct paperwork
It’s too late to fix errors in your account documentation when a customer is refusing to pay or is placed in liquidation. To ensure you are able to pursue a debtor for recover of money, regularly update customer documentation to ensure:
- addresses are current;
- customer details are correct;
- credit applications are signed by current directors;
- personal guarantees are executed; and
- there is a valid retention of title clause.
7. Operate within agreed trading terms
Customers who habitually pay at 45 or 60 days when account terms are 30 days, place a strain on your cashflow. Customers who operate outside trading terms should be placed on stop credit or COD immediately. This will ensure that you limit your exposure in the event of a customer’s failure and will hopefully improve that customer’s poor payment attitude. Setting and enforcing account limits is also a good way to ensure you limit your exposure to a particular customer. They may not like it initially but once a pattern is established most good customers will comply with your request.
8. Maintain machinery
With tightening cashflow, critical vehicle and machinery maintenance is often put on hold. This may save you spending cash initially, however the wear and tear on the vehicle or machine will increase and so will the cost. Having them break down and be unavailable for a week can be very costly to your business, particularly if regular maintenance can avoid the breakdown especially for machines and vehicles you rely on for business.
Replacing machines before the end of their useful life is also crucial. Maintenance costs increase with age and the Government is currently offering tax incentives to businesses that invest in new plants and machinery.
9. Communicate with stakeholders
Keeping in regular contact with key stakeholders like your bank, the ATO, suppliers, employees and customers, will help to improve your relationship with them. Therefore, when times are tough, they understand your business and are more likely to be willing to help. Many businesses that are unable to pay their tax debts on time, simply avoid the issue by not lodging their BAS returns. This approach will often backfire as late lodgement penalties and general interest charges can be applied.
Seeking assistance early when there are more options available can be the difference between business survival and failure. If a supplier is also a customer, you each have a vested interest in the success of your businesses and are more likely to help each other.
10. Develop business and succession plans
Documenting and working out your target customer demographic, desired sales revenue, and store growth through the preparation of a business plan is a useful business tool. Knowing what your targets are makes your daily business decisions more focused and often easier. Business plans will also assist in helping you plan for best, worst and ideal case scenarios and will give you a feel for what you need to do if your sales crash or, hopefully, take off.
Succession planning for businesses is often forgotten. If the key directors and personnel suddenly die or leave, you need a plan in place to minimise the disruption to the business.
Summary
These are just some of the strategies that small businesses can employ to help minimise the risks and enhance their bottom line. Seeking professional advice early on is often the most appropriate strategy for your business to help ensure it continues to prosper in good times and in bad.
–Andrew Fielding is a Partner of BDO Kendalls (www.bdo.com.au), which offers a wide range of business and corporate advisory services to individuals and clients ranging from large corporates to growth-focused SMEs.
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