Getting in good shape to survive the downturn

Key areas around which small businesses should consider taking action

Firms of all sizes and from all sectors need to focus on their cashflow to ensure that they survive and even flourish following this recession. The following points offer key areas around which small businesses should consider taking action.

No two companies are the same and some businesses will already be doing some of the following well. If you can tick off all these actions, you should be in good shape to survive the downturn.

Get closer to customers and suppliers
Businesses with a limited number of key customers and suppliers need to be very careful. If one of these becomes insolvent it can be catastrophic. So you should monitor these key customers’ behaviour in orders, sales, trading trends and business projections.

Most importantly, check their payment performance. Feedback from staff dealing with these customers can be invaluable in identifying signs that a customer is in financial distress or considering moving to another supplier. The same applies to key suppliers. Stress-test your business by asking what the effects of a key customer or supplier ceasing to trade would be.

If you feel your business is heading for trouble it is better to take advice early. Insolvency practitioners complain that companies leave talking to them until the most likely outcome is administration.

Better credit management
During this recession active credit management is vital. This applies throughout the process, from vetting existing and potential new customers by taking out regular credit checks through to securing payment. Late payment is a particular issue in this recession and managing your receivables should be a high priority.
Some key questions to ask are:

• Do you have payment terms? Do these include charging interest on late payment?
  
• Are the terms accepted by your customers?
  
• Do you get regular credit checks?
  
• Is there one person who is responsible for collecting receivables?
  
• What happens if customers go beyond your terms?
  
• Is there a procedure for the directors to get involved in pressuring customers to pay?
  
• How frequently is the aged debtors list reviewed by a director?
  
• What is the procedure for taking legal action to recover debts?

Manage cashflow
There is unlikely to be a time in your company’s life when managing cashflow is more important. The basis of cashflow management is having a system whereby the directors receive daily information on the cash position, either in terms of balances at the bank or how much of the overdraft facility is unused.

In addition, there must be regular forecasts of how the available facilities will change in the next week, month, quarter and year. These should be prepared on spreadsheets and with an automated cash flow management system it is a simple task to change assumptions.

Improve management reporting
With the recession making access to finance difficult, many businesses are concerned enough to want information on their trading performance quicker than they have had in the past. Businesses that produce monthly accounts late in the month, leave directors and finance providers lacking important up-to-date information on their position.

But there are steps that can be taken to improve reporting deadlines, some requiring relatively small outlays. The main thing is often to make shorter timescales a greater priority. Benefits include quicker and better information on which to base decisions; better informed stakeholders, including finance providers; a more professional image when dealing with customers, suppliers and finance providers; more time for interrogation of the figures; and fewer surprises at the year-end. Finally, if your month-end reporting procedures are slick, producing the annual accounts at the end of the year should also be a straightforward routine.

Control gross margin and costs
Businesses can improve gross margin by increasing selling prices; reducing the cost of purchased direct materials; improving the sales mix; reducing waste, write-offs and pilferage of stock; and introducing special lines or temporary products.

Some of these may be quickly discounted but it is worthwhile asking if they might be an option for you. It is also important to review both current and planned capital expenditure which can yield cashflow savings and improve profitability.

Strategy, marketing and product development
Recessions tend to affect different business sectors to different degrees. Time spent on developing new products and markets can yield significant benefits, including reducing reliance on a few customers or one sector, entry into higher added-value products and increased gross margins. It can also increase your attractiveness to new equity providers once the recession is over.

Consider how your competitors are faring and how are they likely to respond to the current crisis. Intelligence from staff, suppliers and customers on competitors can help identify potential opportunities.

Build relationships with finance providers
Even if your business currently has no borrowings or is operating well within the limits of its facilities, spending time with your current and potential new finance providers will be worthwhile.

Some new SME finance schemes have recently been announced by the government while businesses which might require fresh equity capital to finance new marketing or product development, or to recapitalise after the recession, should find out what small scale equity schemes are available from business angels, regional development agencies and more formal private equity funds.

Ensure your business is appropriately financed
Companies seeking finance invariably think of a term loan (for a fixed period) or an overdraft. But it is important to make the finance appropriate to the purpose for which it is required.

Although overdrafts provide flexible finance for working capital, they are repayable on demand. Factoring and invoice discounting, if appropriate, could be an alternative solution for your business as they can yield a bigger percentage advance than an overdraft based on debtors.

Minimise tax payments
You should take professional advice to ensure that you have availed yourself of all the legitimate ways of reducing a tax liability, such as using all capital allowances and including all allowable expenses.

If your forecasts suggest that the business may have difficulty paying the taxes you should take advice before approaching HM Revenue & Customs (HMRC) for proposals to pay by instalments.

In the 2008 Pre-Budget report, chancellor Alistair Darling announced that HRMC had launched a new business payment support service to help businesses finding it difficult to make tax payments on time, including corporation tax, VAT, PAYE and national insurance contributions. This scheme following Budget 2009 has now been extended. Businesses experiencing temporary financial difficulties or needing more time to pay an outstanding tax bill can agree a timetable of payments that they will be able to afford.

Source: Institute of Chartered Accountants in England and Wales