I know from inquiries I have been receiving that a number of my clients are concerned about the gloom and doom they are subject too each day via the media, and the current talk about recession.

In such demanding times it is important to try and remain positive in your outlook.

Recessions are a normal part of the business cycle and generally occur every seven to nine years. This is the first recession we have seen since 1991.

Unfortunately in that recession 75,000 businesses disappeared.

This represents a great opportunity for smart business operators to step back, evaluate how and where you are traveling, and prepare for the next upturn. That is taking some time each week to work on your business versus working in your business. You can significantly reduce the risk of business failure through:

• striking a balance between pessimism and optimism
• ensuring that your expectations are realistic
• do not give up on growth.

In good times it is easy to drift along as financial management weaknesses in your business structure are hidden. However, in a recession these weaknesses can quickly become a real handicap. We are well placed to help you with this analysis. We can do this by helping you to identify those weaknesses and plan, or amend, your strategic direction.

This is a cliche and truism; "businesses dont plan to fail, they just fail to plan". We combine our experiences and using some intelligent forensic software tools we identify the early warning signs, and then work with you in developing strategies to correct these in order to move onward and upwards. Please try to be proactive and recession proof your business. Dont sit idly with a wait and see attitude as the events of a downturn unfold. I am compiling a booklet of ten strategies to grow and protect your business in a downturn, because small business is our passion.

1. Improve the quality of your financial records.

In boom times it is very easy to run a business and ignore your financial reporting system. It becomes problematic when these habits spill over into a recession. Great accounting records are an important basic requirement for any small business. Up to date and accurate financial records provide the vital management information needed to monitor and grow your enterprise. GST was introduced 9 years ago now, but many operators still produce electronic shoe box accounting records. Such records should not be relied upon when making financial or strategic management decisions.

The graphs above, constructed from data taken from a nationwide survey, demonstrates the importance of using up to date and accurate information. The higher the quality and accuracy of accounts, and the frequency of account production, the higher the business survival rate. Such records are also useful when approaching financiers and when selling your business. The ATO also requires you to maintain records for up to seven years (for a company).

Enterprises with up to date accounts can also monitor weekly:

• Debtors and Creditors
• Cash on hand and at bank
• Sales

• Inventory
• Work in progress
• Key performance indicators (KPIs)

While historical information is very useful, you cannot see where you are going if you are continually looking in the rear vision mirror. So forward planning is needed, to forecast where you are heading.

2. Failing to plan is Planning to Fail

A positive cash flow is vital particularly in a downturn, and it just doesnt happen it needs to be planned. Budgeting is a vital part of this planning. A budget is your actual plan expressed in dollars, and will show if or when additional cash is necessary. A Cashflow budget can help to identify periods where extra cash will be required, and quantify the amount of cash needed. A lack of profitability and cash is often the cause of financial failure. A good budget is always a work in progress, being under constant review. Banks and financiers have ignificantly tightened their credit policies following the sub prime debacle, so planning for, and monitoring of financial applications is now vital. Due to the decline in the number of lenders that are left in the market place, applications for loans are also taking much longer to process.

Any Cashflow budget is based upon a number of realistic assumptions regarding costs and income. The information in your Cashflow budget is intended to:

• Forecast the cash position at month end
• Identify cash shortfalls and peak overdraft
• Plan taxation payments
• Schedule capital repayments or expenditure
• Prove to financiers your ability to service loans.

Only when you have completed your budget and are happy that it is achievable, can you identify the need for additional funding. Careful planning may help you avoid cash deficiencies, but you need to arrange extra funding facilities well ahead of time. Ensure you get it right the first time and only ask once. Financiers get annoyed if you have to ask more than once. The budget, being a forecast of future events, can make accuracy difficult. However, we can assist you with the preparation of budgets and by using, what if, analysis of scenarios to test various options. We can then monitor variances on a monthly or quarterly basis when your accounts are produced.

3. Unlocking cash locked up in your firm.

If uncertain economic times are going to cause stress, the first place you will see it is in your Cashflow budget. Positive Cashflow is not enough as the business must be returning a profit and the long term trend for both must be positive. There are many areas that cash can be hidden. It is worth doing a quick estimate of how much money you have locked up in, debtors, suppliers paid too quickly, excess or slow moving stock and work not yet invoiced.

Debtors; unpaid customer accounts:

Do your invoices and statements go out on time? Are your terms too generous? Do you monitor slow paying customers? Consider writing the actual due date on the invoice, rather than 14 or 30 days. Follow up on slow payers, as the squeaky wheel gets oiled. You are not a financier and other businesses should not expect you to finance them.

You may be paying suppliers too quickly:

Negotiate better terms if you can. Check out alternative suppliers and terms:
Keep your suppliers on their toes and make sure that they earn your business.

Work in progress:

Can lock up a lot of cash. Managing multiple jobs at the same time can be difficult, and can slow up invoicing. Delays may be caused by slower delivery of inputs, employee issues, or getting access to information or work sites. Are you are still tracking stock in your head or manually? As this can cause large cash flow challenges.

Stock = cash locked up:

Is there really any reason to purchase large quantities of slow moving items? Many businesses buy stock because they are offered a discount or because the sales rep calls by, without considering the hidden costs. You should only buy stock when you absolutely need it. A just in time inventory policy often liberates a lot of money, saves a lot of cash based headaches, and debt. Your borrowings may be too high because of your stocking policy.

What is the sale cycle of your products?

That is, how long does it take between the time you buy in materials and the time they go out the door? You may have historical information. Otherwise you need a way of calculating how long stock is sitting in your storage area, so that you can reduce the amount of time and increase the available working capital. This method is known as Stock Days and is the average over all stock items. To calculate stock days you need to know:
(Stock on Hand $
Cost of Sales $) * days = Stock Days
For example:
If you had Stock of $125,000 at June 30th and COS of $550,000 the Stock Days = (125,000/550,000)*365 = 83 days. This is where the thoroughness and accuracy of stock takes becomes so important. Accurate figures give accurate answers, rubbish figures give rubbish answers.

So a good stock control system is needed which lets you answer the following questions:

• What is selling?
• What is not selling?
• What items move slowly?
• Are there obsolete items or dead stock?
• What are the seasonal patterns / trends?
• What is your profit margin on each item?
• What is the cost of storing stock?

You can then determine minimum and maximum stock levels for each item, and overall stock cash lockup. Obsolete stock can be an area where a lot of cash can be hidden. It can be very hard making the decision to sell items at a loss, but if those items are going to sit there forever, they might as well sell now, and liberate scarce working capital to put back into items that are selling well. Good records also let you know how many dollars you are spending with each supplier, and can put you in a much better bargaining position when renegotiating prices and terms.

7 other ways to Recession proof your business

We are presently documenting 7 other ways to recession proof your business that will be exclusively available to clients of this accounting practice. We are not your average accounting firm that just keeps the score. We aim to work with you to build a stronger, more profitable and valuable business by combining our consulting tools and expertise with the knowledge of your business.

If you would like to know more, please contact us directly on 03 5571 2774 or 0408 529 730 or at our office which is located at 305 Gray Street, Hamilton, Victoria. 3300

IMPORTANT DISCLAIMER:

Readers are advised that the purpose of this guide is to provide general introductory information. The information has been prepared in good faith and is for guidance only. It does not purport to contain all the information that would be relevant to any particular business opportunity. Further, the guide is provided to interested persons on the basis that they will be responsible for making their own assessment of that opportunity with the assistance of the information provided. The information in the guide should not be relied upon in substitution for professional advice and individual investigation.

Consequently Peter Mulcahy cannot accept liability for any loss occasioned, however caused, as he cannot take into account any specific individuals needs or other considerations. Parties considering any action or refraining from any action, on the basis of the contents of this web page, should first seek professional advice.

You see, small business is our passion!

We are Quality Assured by the National Institute of Accountants (NIA), which means you can be sure every project we undertake is carried out to International Standards, so that you can be guaranteed the precise result you pay for.

Last updated Friday 4th December 2009