Remodelling your business finances to survive the downturn

Staring down the barrel of an almost inevitable recession following a period of economic prosperity, many business owners are wrestling with an uneasy feeling that their businesses are not prepared to weather the challenges ahead. So how can you improve your cash flow situation and secure the financial support you need in order for your business to survive?

With economic confidence high in previous years, securing financial support has been relatively easy for businesses, leading many to get by with inappropriate or inadequate financial reporting standards. However, with asset values on the way down, and lenders’ belts tightening across the country, companies are finding it increasingly difficult to attract the necessary funding to stay afloat and maintain business as usual.

Accountancy firm Lawler Partners has witnessed this first hand, with an increase in businesses approaching them for financial restructuring, reporting and performance advice during this tough time.

Watch which way the cash flows

Cash is the lifeblood of a business. Having a healthy cashflow is critical to ensuring businesses aren’t caught out-of-pocket and can cover unexpected costs. The number of businesses that don’t have regular, reliable financial information on their cashflow is frightening.

Successful businesses are ones that can keep on top of the cash flowing in and the cash flowing out. It’s about knowing where money is, staying on top of finances and having the right systems in place to support the growth of a profitable business.

It is important to realise that while cash and profit are interrelated, they are not the same thing. Businesses need to ensure the cashflow from normal trading activities, as opposed to financing or investment activities, is positive, and if it isn’t, action must be taken immediately.

There are a couple of simple tools that can be used to evaluate a business’ cashflow position:

  • Establish a cash forecast for the coming year. At a minimum this should show the monthly closing cash balance, so that appropriate planning can be undertaken for the leaner periods. Understanding the business’ own cashflow cycle on a line-by-line basis is the valuable result of doing a forecast.
  • Monitor the business’ main ‘cash competitors’ closely. These are normally stock and debtors, which can often be the real drains on company cash.  Develop specific strategies to reduce the number of days debtors are outstanding and the number of days stock is on hand.

If it matters, report it
Businesses large and small are intensely aware that contracting market conditions mean a company without proper financial reporting systems is not going to survive for long. To ensure that back office systems provide relevant information, it is imperative that accurate and up-to-date reports are kept, so managers can stay on top of any changes in businesses operations. These reports should show both financial and non-financial ‘success’ indicators, with the latter usually being better forward planning signs. Consult an accountant about these reports, as they form the basis for making good decisions.

Here are a couple of tools to consider:

  • Develop a brief report to show the business’ key performance indicators (KPIs), and monitor it regularly. This needs only to be a one-page document which includes daily sales, number of customer transactions, the amount of daily bankings, the balances of the bank, debtors, stock and creditors, and gross profit.
  • Every business has its own KPIs and including these on the report and monitoring them closely it can provide an early warning sign of potential trouble ahead. It’s a quick way to see how the business is travelling.
  • A quick relevance test is to ask “What is it about the business that is really concerning?” and then develop an appropriate measure or indicator for this.
  • Develop a departmental or category profit and sales report. Knowing the source of the businesses’ profits helps with making sound decisions. For example, identifying the highest profit products or main customers will help focus the company’s promotional and marketing efforts to get the best value for expenditure.


Make forward planning essential

Business owners need to make time to work on their business, not just in it. This especially applies in uncertain economic times. Planning should be a normal part of business operations, not an annual event.
A couple of helpful tools are:

  • Make time to do a profit budget for the coming 12 months. Don’t just add margin to last year’s figures. Instead let the critical success factors for the business be the drivers. If these are not already identified, now is a good time to determine them. A good place to start is to determine the targeted revenue from the bottom line so an adequate profit to cover the investments in the business can be included, creating a ‘profit breakeven’ business approach.
  • Hold a strategic planning day or meeting with relevant staff to step back from the daily business routines and consider the business position: where the company needs to be and the strategies to get there. Given the changing economic circumstances this helps minimise risks and maximise the opportunities that are available.


Take control of costs

The old saying “Don’t be penny wise and pound foolish,” is particularly appropriate in the current business climate. Be strategic in cutting costs. Longer-term and recurrent savings are usually preferable to short-term savings. Staff are usually a key resource in any business so before making any significant staff cuts, be sure the benefits are clear, and that all alternative options have been considered.

When evaluating costs, it is best to look at each expense in isolation, focusing on the largest four as a percentage of sales revenue, and compare to industry averages as a guide to where efficiencies can be made.

Getting your businesses finances on track is a simple case of evaluating your cash flow situation, planning ahead and taking control of your costs.

-Anthony O’Sullivan is a director of Lawler Partners (www.lawlerpartners.com.au).


Case study
ModelCo and the lipstick-led economy

For the past 18 months, Lawler Partners has been working with phenomenally successful Australian cosmetics company ModelCo.

Since launching five years ago, ModelCo has experienced 350 percent turnover growth and spectacular global success. With the brand now sold in more than 1,000 stores and niche beauty shops across 27 countries, the company is an example of why success presents its own challenges.

“Sometimes it’s as tough for successful businesses in managing their cashflow as it is for businesses which are heading in the wrong direction financially,” says founder Shelley Barrett. “We are growing quickly so the landscape of the business changes all the time. Lawler Partners has helped us understand the changes that needed to be made to our business model so we were equipped to keep growing.”

ModelCo is expanding in the USA and allocating cash effectively is critical. “Having clear reporting frameworks, and aligning these with what we want to do strategically, has been critical to our success,” says Barrett. “We ensure we receive ongoing commercial advice and review of our financial processes. Part of this approach is to have our financial advisors attend our monthly board meetings. They’re well positioned to make judgement calls on the financial aspects of the company’s approach.”

The company is seeing positive signs of the theory Americans support; that as the economy slows down, lipstick sales go up because people like to give themselves an inexpensive lift. “Our commitment to providing our clients with ‘quick fix beauty tricks’ has resulted in something very exciting that is aligned with this theory of a lipstick-led economy!” Barrett says.

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