Reduce your reliance on external debt
To reduce your reliance on external finance, businesses should be focused on increasing the productivity of existing assets and employees and improving cash flow. Improving cash flow can free up money to fund necessary purchases or investments without having to seek external finance and can be used to pay down debt.
Consider undertaking the following to improve cash flow:
- follow up on outstanding debts
- prepare regular cash flow forecasts
- prioritise your marketing to products and services that can be turned into cash quickly
- make full use of your suppliers’ payment terms, but do not pay late
- reduce stock levels and replace slow-moving and obsolete stock with stock that has a faster turnover
- sell unnecessary assets.
Improve your productivity
For a business to be successful in good times and bad, it needs to ensure that their business is operating as efficiently and effectively as possible.
- evaluating the current performance of your business by collecting data on business performance and comparing that performance to previous performance, industry benchmarks and the strategic goals of your business
- identify key drivers of your business and set goals for such drivers
- regularly evaluate performance in those key drivers against such goals and identify areas for improvement, areas of risk and trends. The best way to do this is to develop a system that allows you to present such evaluations in a clear and concise way, such as dashboard reporting
- implement strategies from such evaluation and monitor their effectiveness, adjusting the strategy if necessary.
Review your cost structures for savings
Increasing business costs was a theme in some of the markets surveyed. If a business cannot bring costs under control or pass increased costs onto customers, this reduces both cashflow and profitability and can impact the future viability of your business.
- reviewing costs under your control. Be strategic in cost-cutting as it is not uncommon for businesses to cut aggressively, only to have to reverse some of those cost-cutting measures later on
- do not be afraid to ask suppliers for discounts and/or change how and when they deliver stock to you. This can for example, reduce warehousing costs if suppliers can give you “stock on consignment” or if they supply to you on a “just in time” basis
- compare your cost structures with other businesses in your industry and with your past results to identify areas for improvement.
Adopt appropriate risk management strategies
Uncertain times may expose your business to risks that threaten its viability. Businesses should develop appropriate risk management strategies that help to reduce the following risks:
- relying too heavily on a small number of major customers
- relying too heavily on one supplier
- relying too heavily on one type, or source, of finance
- selling on credit without appropriate checks and not following up late payments
Review your business plan for the changed environment
If business conditions change, it is good practice to revisit your business plan and budgets and amend them to reflect current circumstances.
It is recommended that businesses:
- review the assumptions underpinning your business plan and, if those assumptions have changed, amend your plan to reflect such change
- evaluate performance and incorporate strategies to improve performance in the business plan
- reflect your amended business plan in your budgets and forecasts
While businesses may experience uncertainty, opportunities will still emerge. Do not turn a blind eye to such opportunities if they are consistent with your strategic direction and can be properly funded. You may also need to create opportunities, such as by seeking out new markets.
To implement these steps to help you manage through the current uncertainty and position your business for growth, CPA Australia recommends you seek professional advice from your accountant.