The start of a new financial year is always a good time to look at plans and activities that will help the business over the next 12 months. This year, planning will be even more important as businesses deal with a challenging economic environment, high interest rates, and low consumer confidence.
Commentators and economists have varying views on what the next year holds – whether interest rates will continue to go up or start heading down; and whether the Australian economy will enter a recession or recover from the recent downturn.
Even those who say that the Australian economy is better placed than most to survive a global recession also admit that Australia cannot expect to escape unscathed.
In these circumstances, it is a good idea to take a good hard look at the overall business position. Preparation now will help businesses ride out any difficulties. For SMEs in particular, it makes sense to review the approach for the next few years, with a view to ensuring that there are plans in place for any eventuality.
This review should cover five or six main areas where efficiencies can most easily be gained, such as waste and expense control; expansion plans; inventory; debtors; and overall debt.
Waste and expense
Many businesses waste time and money on activities that don’t add much to the business’ success or growth. When times are good, such waste is possible to overlook, but during more difficult times, any inefficiencies must be ironed out.
While businesses shouldn’t curtail essential activities in a way that damages business growth, a prudent approach in uncertain times could be called for.
Look at operating expenses generally to see if there are cost areas that can be reduced. A good starting point is to review the expense side of the business accounts for the last few years and to see what areas have increased most and to analyse these to see where savings can be made.
For example, staff costs can rise quickly in good times and therefore should be reviewed now, particular in areas of the business that might experience a slow-down. However, keep in mind that good staff can be hard to find and expensive to train, so any redundancies require a good deal of thought.
Inventory is one area of cost that is often overlooked. Inventory needs to be funded, and reducing inventory levels can be a great help in reducing borrowings.
Businesses should look at individual inventory lines, particularly the high value ones, to make sure that the levels being held have not increased. If it has, this may indicate lack of demand for certain products and, if this is the case, ways of reducing holdings such as special offers on such lines should be considered.
All expansion plans need serious review in the present circumstances. This is not to say they should all be shelved, but plans that require taking on major debt or other operating costs, such as increasing rental on new premises, should be reassessed. This may not be the best time to add costs to the operations, particularly if there is a chance of doing a better deal in a few months time?
A good attitude for tough times is to be income-led. This means that any change or initiative introduced must directly create income for the business. By operating in this way, business owners make sure that any additional costs created in the current environment will consolidate or create income rather than invest in long-term opportunities or areas where success may be uncertain and new income difficult to achieve.
A common feature of many businesses that do not survive a recession is that they have not paid attention to their debtors. This is particularly true of businesses with one or two customers that, if they were to default, would cause the business to suffer serious losses and potentially collapse. Business owners should continually monitor the debtor situation, making sure that 30-day accounts do not blow out. This will do more than anything else to help a company look after its liquidity and, ultimately, survive.
Owners who look after the debtor side of the business in a disciplined way are in fact strengthening their business.
Reduce own debt
Lower interest rates and increased competition amongst lenders has made it fairly easy for businesses to take on debt in recent years at no great pain to themselves.
However when things toughen up – for instance in a recession – those friendly lenders are often the first people to appoint receivers. We are already seeing banks being hit by defaults and they will get more and more stringent in their efforts to reduce these numbers.
The cost of capital is often viewed as an essential cost of doing business. But the less you borrow, the smaller the ultimate cost.
If a business’ debt is expanding in a way that is not creating income, it should be seen as a warning sign. In other words, if the debt is not funding new sales and expanded market share, it may be that it is simply funding costly and wasteful habits within the business; for example, excess inventory or the debtors’ ledger as described above.
In the present operating circumstances it is a good idea for business owners to aim to reduce debt levels. Increased debt should be a last resort after looking at all other remedies and making sure that the debt is productive.
During more difficult conditions, business owners must make a greater in order to effort to assess and measure business success. When times are good, this tends to slide, but now is the time to refocus attention and make sure the business is performing the way it should. Business owners often find that their perception of how the business is performing, and the reality, are very different.
There are many areas to look at, such as sales, costs, or revenue growth. Remember that customers drive revenue growth and you need to measure such things as customer intimacy, operational excellence and, in large businesses, product leadership. Measuring sales is often too late. Business should focus on lead, rather than lag, indicators.
Understand the customer
As times get tough, many customers start to tighten their purse strings. Understanding the customer base and their purchasing habits will become increasingly important.
It is a good idea for business owners to look at where they fit in their customers’ own operations. For example, businesses that are an essential supply line probably have less to worry about, but those that are one option amongst many may find themselves doing it tough.
Also consider how customers are likely to suffer in a downturn or a recession. Are they going to cause problems by being slow to settle accounts (or possibly not pay at all)? Many good businesses end up suffering and even failing because they rely on one big customer that doesn’t pay on time.
On the other side of the coin, review suppliers – they are a key factor in a business’ ability to service customers. Business owners should ensure suppliers are likely to survive a difficult market, and continue to honour warranties and recalls. Also make sure there are alternatives so that if the worst does happen, it doesn’t affect your own customers.
Dennis Mattiske is a partner with accountants and business and financial advisers HLB Mann Judd Sydney.