Make your Business Robust - Don't Wait for a Recession!

“When you have exhausted all possibilities, remember this: you haven’t.” – Thomas A. Edison

Introduction

Economies are experiencing rapidly rising interest rates, the highest inflation rates in a generation, and ongoing disruptions from pandemic and war.

A global recession is looming. Many businesses will experience dips in sales, profits and cash flows. This threatens the survival of many small businesses who typically have lower levels of profits, positive net cash flows, cash and capital reserves.

Whilst recessions have historically been part of economic cycles, Australia has not had a recession since the early 1990's; that is until Covid lockdowns hit us in 2020.

In this article, we look at a number of key steps which businesses can take to cushion the impacts of any business downturn and reduce the worrying. These steps focus on customers, suppliers, staff, costs, cash flows, and capital management.

1) Know where your business is going

Firstly, know your firm's current financial position:

• How much is the pipeline of orders or future projects? Are your customers still buying from you?
• How are the Assets & Liabilities stacking up? Are your liabilities running ahead of assets?
• Is the business solvent and able to pay its suppliers and wages?
• Forecast your trading and cash flows for the next 6 - 12 months. Will the business have enough cash to survive?
• Conduct What-If Scenario analysis with worst cast scenarios. This will be instructive in providing options to increase business resilience.

You will need help from your CFO to review the current situation and discuss options required to withstand the downturn.

2) Build up cash reserves

Even in normal times, every small business must maintain cash to cover their fixed costs in the event of a disruption to cash flow - loss of a major customer or project, major delays in projects, and other factors. Better to be safe than be insolvent and suffer unnecessary stress.

Major recurring payments include staff, rent and loans. Your cash reserve in normal times should cover around 3 - 6 months of outlays.

Downturns can last around a year. Accordingly, allow for increased cash reserves to cover at least 6 months of normal outlays.

The Covid lockdowns illustrate the severity of business interruptions, which we would not have contemplated in the past.

The increased incidence of major climate events - storms, flooding and fires all remind us of the need to build resilience into our businesses.

Cash Flow Management

a) Dividend payments can be reduced or suspended depending on the personal financial needs of owners.

b) Delay capital expenditure and major maintenance unless mission critical for your business.

c) Do not delay in invoicing your customers.

d) Keep chasing customers for payment. Get EFTPOS and credit card payment facilities.

e) Take legal action for slow paying customers.

f) Negotiate better payment terms from suppliers.

g) Negotiate better pricing and discounts from suppliers.

3) Organise funding facilities

“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.”

Depending on your type of industry and business, arrange the best finance facilities from your bank or other finance sources. It is better to do this when the economy and your business is performing well. This will enable cover for when there is a shortfall in cash flows. Options include:

* Bank Overdraft or Line of Credit

* Bank Loans, or refinanced loans at better rates and limits

* Equipment & Vehicle Finance

* Trade Finance (Purchases)

* Customer Invoice Finance

* Refinance home loan with better rates and higher limits which are serviceable

* Roll major credit card debts into a loan which has much lower interest rates.

Lenders will need 3 way forecasts and up to date accounts and tax returns. Speak with your CFO, Bank Manager or Commercial Finance Broker about the best options.

Finance facilities must be reviewed every 6 - 12 months to ensure that they give you the best options and flexibility and interest rates are competitive.

4) Inside Your Business

"We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more". Satya Nadella

Staff

This most important resource in your business is often overlooked. This results in lost opportunities to engage staff, innovate, improve staff capabilities, improve productivity and retain staff.

When dark economic clouds are looming, have honest conversations about how you will work together to get through the uncertainty.

When staff feel reassured, you are likely to get better culture, maintain or improve productivity and retain staff. Staff can find you new staff via word of mouth recommendations.

Staff are often a great source of new ideas and feedback. Regular (often quick) conversations builds engagement, ownership and a strong culture.

If you must retrench staff, do it as soon as possible in a respectful, empathic and private manner. Offer support to the retrenched staff to get their next job. Reassure remaining staff that the firm will get through the difficult times.

Do not cut staff willy nilly, especially without considering what happens when the downturn ends, and you are short staffed! Consider the options available to you. Downturns are temporary!

Operations

Review key workflows with your staff from time to time. Workflows can vary with changes in staff dynamics based on their continuous learning, new technology, materials, etc. Productivity improvements increase profitability for your business with no significant increase in costs.

Review your product and service range. Delete any products or services which are weak contributors to your profits. Do the same with low profit customers.

Technology

The first Covid lockdown provided a pivot for many firms due to Work from Home and online sales and contactless delivery.

Technology investments offer significant benefits:

• Customer touchpoints increase seamless workflows in both B2B and B2C. This improves customers' perception of value and satisfaction (make it easier to buy and track orders).
• Inside the firm this reduces clerical intervention and errors and improves productivity.
• Staff engagement, satisfaction and production improves, whether at the workplace or in a WFH situation.

Do not wait for a Covid like disruption to invest in technology as the benefits await your business.

Cost Management

Review all your costs with a zero based budgeting approach. Many businesses get "fat and lazy" over the years.

Focus on major costs - rent, travel, and non-essential items. Trim as much as possible without affecting operations and staff productivity.

Review your online advertising costs to ensure that Return on Investment is effective. Adjust you spending as required.

Assets Management

• Reduce inventory holdings.
• Conduct a clearance sale for slow moving, damaged and obsolete stock and samples and display stock.
• Sell unused equipment and vehicles.
• Downsize your office by sub-letting or reducing lease.

5) Outside Your Business

"One hand washes the other"

Customer Interaction

Customers' feedback is invaluable at all times in successfully driving your business. Their needs change and they will feel engaged when you listen to them.

• Have regular customer conversations, especially in B2B.
• Review credit terms and carefully provide extended credit if requested. Check their credit ratings first.
• Adjust your product and service offerings. Customers may change their order quantities and frequencies.
• Innovate in your product and service offerings. See how this positively affects your customers perceptions of value creation for them and their customers.
• Watch out for customers who start to delay their invoice payments. Ask them if they are OK. Keep asking for payment. If they keep pushing you back, get legal help to secure payment.
• Subscribe to credit agency reports if you have many customers with credit facilities. This can prevent or minimise disasters in defaulting customers.
• If you have large customers, speak to your insurance broker about Credit Insurance.
• Review your marketing strategies and adjust to drive sales.

Suppliers

Maintaining strong supplier relationships is vital for continuity of supply of goods and services - essential to keep your business. Your suppliers also worry about your business and their other customers.

• Review credit terms. If appropriate for survival, negotiate slower payment terms, at least for the duration of the downturn.
• Negotiate better prices, especially if you have a long trading history with them.
• Look for alternate suppliers if your current supplier is not being helpful.
• Are your key suppliers capable of surviving a downturn? Look at alterative suppliers if your supply chain is threatened to the extent of stopping business operations.

6) Business Management & Strategy

"Tough times never last"

Management

• Stay within your cost budgets.
• Be flexible and adaptable in your approach. Things change as time goes by.
• Ensure that you and your staff stay healthy and undertake exercise, diet and relaxation. This will provide stamina for the tough days which can be draining!
• Get appropriate advice from specialists - CFO's, Financiers, Technology, Marketing, HR and Operations. Business owners cannot address and adapt to the uncertainty of recessions on their own. Why? - They could be on the wrong track due to cognitive biases or overwhelm, or just don't have the expertise or experience or time.
• Get advice from your business insurance broker on matters such as Loss of Profits Insurance and Disaster Damage. It can be really useful.

Strategy

In any downturn, some industries continue to prosper (roughly 25%). The reality is that life goes on and opportunities present to many businesses.

• Be willing to pivot. A good example was restaurants who switched to 100% delivered meals during the pandemic lockdowns.
• New revenue streams often present. Another pandemic example is the breweries and distilleries who added production of hand sanitisers. Their production of beers and alcoholic spirits continued apace.
• An increase in WFH businesses has presented opportunities for strategic partnerships. A good example is in the marketing services sector where specialists combined to provide total solutions for common clients. To produce marketing content requires designers, writers, video and camera operators, post production, printers, web developers, social media and more.

SUMMARY

Global economies are experiencing the increased incidence of uncertainty and volatility due to multiple reasons - climate events, pandemics, geopolitics, wars and cyclical downturns.

Individual firms must continually work to be resilient and robust to survive recessions, downturns and disruptions.

Small firms require additional work due to their lack of financial resources and management capabilities.

The key areas and steps to create more business resilience are:

1. Maintaining strong cash flow reserves and financial strength.
2. Financial (borrowing) facilities in place in the event of additional need for finance.
3. Developing a strong team of staff who are engaged and capable.
4. Maintaining strong sales pipelines and ongoing sales. This is underpinned by effective marketing and good customer service which drives customer loyalty.
5. Ensuring chains are robust. Ensure supplier relationships are strong and supportive.
6. Good management who take and act on advice provided by specialists.
7. Organisational agility, flexibility and adaptability.

Tough times and good times are cyclical. Firms can get fat and lazy. At all times, it is worthwhile preparing for rainy days; prepare for the worst and enjoy the best times.

All the best in your business.

Frank Choy, Virtual CFO

15 October 2022