Sound business and financial planning is always important especially in times of economic uncertainty.
By Dave Hickey F.C.A.
As concerns over the Irish, European and global economies continue, it is essential that all businesses, particularly small and medium-sized enterprises, are properly prepared for financially-testing times. Sound business and financial planning is always important but becomes vital in times of economic uncertainty.
We’ve asked our clients and colleagues for their recommendations on what works for them when facing a very uncertain outlook.
1. PLAN WHAT YOU CAN – (AND SHARE IT!)
Planning is vital for the success of your business. You need to plan the changes that can strengthen your enterprise against tough times, and how those changes will be put into action.
If you have the resources and time to prepare a detailed monthly plan for the coming year, then do it. Even if you don’t have the people or expertise for a detailed exercise, you should at least spend time on planning the important things such as sales, staff costs, cost of sales and working capital (e.g. how much cash will be tied up in inventory, work-in-progress and debtors).
A plan with action is just a dream! Make sure that you understand what actions are needed to make the plan, who will make the actions happen and when they need to start.
Even if you work on your own, it’s important to write the plan down so that you can keep track of progress against it. This is more important if you need other people to take actions to make it happen. By sharing the plan, you may also get others’ ideas on how to improve it.
If you don’t already prepare regular financial projections to support your plans for the next year and beyond, you should start now. Having a plan which you can adapt as circumstances change is much better than having none at all – but only if you update it regularly to reflect past performance and changes to the economic outlook for your sector.
2. EARLY WARNING SIGNS
Having prepared a plan, you need to keep track of how you’re performing against it.
It can be tempting to quietly forget about the plan particularly if things aren’t going as forecast in the early part of the year. If you go behind early in sport, you don’t just give up, forget about the score and just keep doing the same things. You try to improve performance and score more! It’s the same in business.
Develop some simple early warning signs. They don’t have to be sophisticated just relevant to your actions and performance.
What are the reliable indicators of economic performance in your business?
Your cash balance is useful but it’s a result of other things such as sales, credit control, etc.
Indicators like Average Daily Sales, Average Sales per Customer and Days Sales Outstanding are straightforward measures which you can review monthly or weekly to get a better feel for what’s causing changes in your cash balance.
Pick one or two easily calculated measures which you can review frequently.
3. LOOK AFTER THE CASH
Keep Inventory turning over
The amount you have invested in stock is cash you can’t use for something else, so keeping your stock levels as low as possible, while still satisfying customer demand is a habit worth developing. If you have good stock control systems, then use the data produced to help improve in this respect.
If you’re offering a service, you may still have an investment in work-in-progress, that is the amount of time put into delivering the service before you can invoice and collect on it. For example, if developing a new website takes three months, the time spent doing that until you can invoice for it, is work-in-progress.
The key here is to agree stage payments for delivery of key milestones and then to make sure they’re invoiced as quickly as possible.
Manage your Debtors
This is essential in an economic slowdown – you will soon encounter difficulties if you allow outstanding debts to accumulate, a problem which is all the more likely in lean times. Make sure you have a clear policy for collecting debts and that customers are aware of it. Above all, ensure you enforce it. Pursue outstanding debts with letters and telephone calls, and threaten legal action if you have to.
Ensure that your terms of business allow for adding interest on overdue accounts. If your terms set credit limits, stick to them and stop supplying as credit limits are reached or bills go unpaid.
Manage your creditors
Banks & Lenders
If you have the cash available, you should repay or reduce bank loans and overdrafts as much as possible. Interest rates will continue to climb, costing you more every time.
If you’re in a structured payment arrangement with your bank or lender (e.g. a loan repayment) then they may already require you to give quarterly or more frequent financial updates. You could use this opportunity to start a discussion about re-scheduling your debts if necessary. You’ll need a decent, realistic set of financial projections for this – see below.
Talk to your suppliers about credit terms. Let them know if you see difficulties in making payments on time. Most will want to work with you and keep you as a customer.
Revenue announced an extension to the repayment period for Warehoused Debt (WD) last month. This is good news if you are part of the WD scheme. If not, and you can foresee difficulties with making PAYE, VAT or other payments, then engage with Revenue, maybe through your accountant. My experience is that Revenue will listen to a realistic proposal from a taxpayer who has a good recent track record of compliance.
MAINTAIN CUSTOMER LOYALTY
In difficult times it becomes harder to attract new customers. Therefore, it is more important than ever to maintain loyalty amongst your existing ones. Consider ways of developing and rewarding customer loyalty, such as selected discounts (especially for early payment), regular mailings or loyalty cards.
Beware of cutting prices
If receipts begin to taper off, it can be tempting to cut prices. But this can be a mistake. In a recession your costs will inflate and as a result you may be forced to raise prices to cover this expenditure. Cutting prices can also have the negative long-term effect of devaluing your image in the marketplace. Remember that suppliers might raise their prices as well, so try to negotiate a long-term discount with them.
Don’t skimp on marketing
The marketing budget is often the first casualty in a recession, but smart businesses continue to market through a downturn and position themselves to take full advantage of the upturn as soon as it starts. In tough times the marketplace becomes more competitive – you may need to market more vigorously, not less. If you do not have a strategic marketing plan, now is the time to draw one up.
LOOK AFTER YOUR EMPLOYEES
While job cuts may be necessary in some circumstances, you should always try to retain your key employees: their strengths will help you through an economic downturn, and you will need them when business picks up. You should use any dips in the market as an opportunity for key staff to develop new skills and coach newer members. Remember, employee motivation can rapidly deteriorate in times of economic uncertainty, so maintain good communication with your staff to prevent a decline in morale.
Cost management is always important but it’s vital in tough times. It’s tempting to slash any costs you can, but this can be counter productive.
Next time we’ll look at Managing Costs in Tough Times.