Surviving the Financial Crisis - SUMMIT Business Accountant

We all know that we are in the middle of a significant financial contraction but where are the major risk areas for business? While different businesses will be affected in different ways, there are three key areas to look out for: profit volatility; cash; and debt.

The greatest risks with profits will not come from your cost structure. It is more likely to be volatility in income. If you are in a sector that relies on discretionary spending or where your income is dependent on contracts from other major corporates, watch out for any downward trends or dependency on one or two key customers. The more you can spread that risk over a broad client base the lower your exposure. There will be some businesses that get caught out by the flow-on effect. In these situations there is generally nothing wrong with the business, it is simply caught in a sharply contracting supply chain. In the same way that you should avoid dependency on a few key customers you should also avoid dependency on a single product or service. Generally, risk will reduce with spread.

While your cost structure may not be the main problem, it is what will cause major problems if revenues fall. Keep your eye on your cost structure and make sensible cuts where appropriate. Make sure though in the search for savings you don’t cut to the bone of your business. If you do, you will remove the essential revenue generating capacity that you require.

A lack of profit will eventually erode your business but not enough cash will kill it stone dead. Businesses will fail because they don’t manage their cash position. You need to more aware than ever about your cash flow. This not only means closely monitoring your debtor collection and inventory but running a rolling three month cash flow position. This should provide an early warning of problems coming. Try to create a cash buffer to manage the unexpected. With the best of planning and management, allow for the fact that the unexpected can still happen.

Manage your debt levels carefully – your financier is likely to. While there is nothing wrong with debt, it is likely that the banks will be closely watching customer accounts. Where you have loan facilities in place make sure that you understand the loan terms and any debt covenants that you have entered into. These covenants could include regular reporting to the bank, debtor and working capital ratios, or debt to equity ratios. Where the banks may have been more relaxed about these in the past, it is likely that 2009 will be the year of more active management of customer accounts. If you believe that you will need additional funding, talk to your bank early up.

Don’t wait until the last minute. You’ll need to present your case on why you need it, how much, for how long and when it will be repaid.

Financial management will be essential in the coming months. You need to be close to your business numbers and manage them actively. The more relaxed your approach to your finances the higher your risk exposure. Cash flows, operating budgets, cost control and debt management all need to be part of your business management. The more in control you are the lower your risk position.

For advice and assistance to take control of your business and improving your management reporting, call us today on (03) 9602 0600 or click here to arrange for a free consultation.

Top 3 Christmas business tips

1. The big squeeze: to discount or not to discount

Discounting; everyone’s doing it to keep revenue flowing.

Gerry Harvey, Harvey Norman’s eclectic Chairman is upfront about the current conditions stating that the retail giant has suffered a 32% drop in profits in the three months to September.

"In all the time I've been around, electrical and computer margins have never been hit as hard as they are at the moment, because you have so many retailers out there just trying to survive on a day to day basis," Mr Harvey said.

For smaller players, particularly in the retail sector, it is a case of ‘damned if you do and damned if you don’t’. At the very least, you need to understand the impact on your profits.

Essentially, by discounting you are giving away some or all of profits. The key is to understand the impact and just how far you can go.

Consider the following example – a business with a 30% gross profit margin who offers a 25% discount (certainly nothing unusual about that in today’s market) requires a 500% increase in sales volume just to maintain the same position – and in almost all cases that’s just not going to happen. The result generally is that the business trades below its breakeven point and generates losses. And, you can only do that for a limited amount of time.

2. Put the time in to review your debt

The December Reserve Bank of Australia rate cut announcement brought the official interest rate to its lowest level in six and a half years. Official interest rates are now at 4.25%.

Typically, we take on debt at different times and it is often linked to a major purchasing decision or event. Much of the focus at the moment is on official cash rates but what about the rates for other forms of debt? Investment loans can be 6-10%, overdraft rates around 10% and credit card debt 12-20% with store debt sometimes 20%plus. When you utilise these forms of debt you may find that your cost of borrowings escalates quickly. If you have a mix of business and personal debt then chances are that most of your business debt is charged in the 8-12% range. Put into perspective, for every $100,000 of borrowing you have, you may be paying up to $6,000 per annum more than you need to.

One way of improving your debt position is through debt consolidation. Debt consolidation is about getting the right mix between debt cost, term of repayment and your present cash flow availability. If you have not had a banking review done for some time, now is the time to do it.

Contact us today for assistance and we’ll put you in touch with specialists who can work with us to reduce the cost of your cash while we ensure that any change takes into account your business and taxation needs.

3. Market like mad!

Marketing is more important than ever to stimulate spending and bring in customers and clients but it needs to be closely reviewed and monitored for effectiveness.

The effectiveness of any campaign is directly related to how well you target it. Direct mail campaigns have around a 3% take up rate but you can improve your conversion rates with improved targeting. It could be as simple as making the most of your existing market by staying in contact with your customers.

Plus, think about what products you’re marketing and ensure that the focus is on those with the highest profit margins. Even if these products are not the big sellers, you can always use strategies such as packaging to ‘piggy-back’ off high volume/low profit items.

Staff training is also more important than ever. Poor customer management will cost you dearly in a market where there are few purchasers. Make sure everyone understands what is being sold and understands any offers or packaging incentives.

Contact us today for assistance with your marketing or business plan, we specialise in web-based solutions.

Quote of the month

The function of leadership is to produce more leaders, not more followers.
Ralph Nader

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.