By Sue Hirst, Co-Founder CFO On-Call
If you can ‘keep your cool’ when all around is panic and mayhem you could set up your business for not just survival, but greater profit and cash flow when things improve.
It’s all over the news that business and consumer confidence is low and that Australia and other western economies are experiencing tough times. Money is tight and many business sales are falling. This is not good news for many small to medium enterprises, but it can present a chance to take stock and even get the ‘edge’ over competitors who don’t treat the situation as an opportunity.
Business owners need to show leadership and retain the confidence of staff and other stakeholders. Staff morale can be extremely sensitive in tough times, so it’s important to focus on managing the business as well as possible and be honest with staff. In my experience good staff members can be your best ally in troubled times, if you trust them and get their help in decision making.
SMEs often have an advantage over larger businesses, in that they are able to act more quickly and decisively. Larger businesses often have office politics and various departments trying to protect their own ‘turf’, whereas SMEs are more ‘down to earth’. Having said this though, it can be detrimental to employ ‘slash and burn’ tactics to survive a downturn. By ‘slash and burn’ tactics I mean indiscriminately cutting costs without really thinking about it strategically and how this might impact on the future of the business.
The best place to begin handling a downturn is to work towards where you want to be when things pick up again.
Ask yourself these questions:
- How do you want to be running your business? e.g. in the traditional way you have in the past, or in some other way, perhaps taking advantage of technology or the changing market.
- Is it the right ‘business model’ i.e. are there better ways to structure the business?
- What type of customers do you want to work with?
- How will you market your product or service?
- How will you sell your product or service?
- What resources will you need to deliver products and services and how will you deliver them? Resources includes human as well as equipment.
- Where will you operate your business from?
- What price and cost structure will exist?
- How will your business be funded? Will external funding be required or will it be self funding?
Once you have a picture of your ideal business you can begin to look at the cost of running such a business. A great place to start is with a serious review of your Profit and Loss Statement.
When times are good most business owners spend little time worrying about every cent that gets spent. When sales start to fall though, this is the very best place to start.
Begin by looking at direct costs e.g. cost of products for sale and labour costs. Are their alternatives or better methods of delivering your product or service? How are other businesses doing it. Perhaps do some research on the internet to see how overseas businesses are doing things.
How we saved $250,000 per annum
Next, work your way through every line item on the Profit and Loss Statement. Some time put aside to focus on this issue, can be some of the most profitable time you will spend in your business. It may seem tedious, but when every cent is coming out of your pocket as a business owner, believe me, it’s worthwhile. I went through this exercise myself a couple of years ago and came up with approximately $250,000 per annum worth of savings. I looked at every single item and thought “How can we do this better, more efficiently and more cost effectively?”. Lots of self discipline is necessary and a little sensible ruthlessness as well.
One terrific example is telephone and communication costs. I discovered we were paying eight different service providers. During analysis I discovered there was a lot of wastage and unnecessary phone lines being paid for. I did some investigation and found a better and cheaper method of communication through an ‘IP’ phone system. We needed only a small amount of new equipment costing approximately $700 and the savings have been approximately $1,000 per month!
We did have to shed some staff and this caused a little rockiness for a short while amongst the remaining staff. The staff soon realised though, we were serious about the future survival and profitability of the business. I know they prefer to work for a profitable business rather than one that is struggling to pay it’s way with unmotivated management.
The important point to realise in relation to cost savings is that every dollar saved is a dollar straight onto the bottom line. Whereas every dollar of extra sales may only be a matter of cents onto the bottom line, because a sale carries with it direct costs and overheads.
Cash flow also needs serious attention during a downturn. When sales fall it can take a little while for the effects to be felt i.e. if a business is slow to collect payment from customers normally, the effect of reduced sales may not be felt until actual payment is received. Stock needs to be more closely managed to ensure only the stock that is required is purchased. If you are purchasing stock on credit terms you could get a double whammy of reduced sales and collections at the same time as paying for stock that is taking longer to sell.
All of the above may sound like doomsday stuff, but if you can be realistic and take the tough decisions now, your business will be in a much better position when the downturn ends. Your business will also be in a much better position than competitors who haven’t properly managed the downturn or indeed survived it. When the upturn arrives your business could be even more profitable and valuable.