This is a question every business should be asking themselves. In times of economic uncertainty, you should look very carefully at your client or customer base to determine the likely effect on revenue sources and only deal with clients or customers that benefit the business activity.
The degree of impact will depend on your industry, your customers, your competitive position and your ability to respond to a crisis.
Most businesses fall into one of four risk groups:
those that have already taken a direct hit Ansett suppliers fall into this category; businesses feeling flow-through effects already examples of such casualties include tourism related businesses facing massive cancellations; businesses that see it is only a matter of time before they are affected; and those that are untouched so far, but need to make contingency plans. All businesses should be vigilant in measuring the effects of a loss of sales on their business. You should be watching the trends in your industry if you are not already affected, and if you haven't already done so, start monitoring your business income and compare performance against similar periods last year. Businesses selling essential items are probably less at risk than those dealing in luxury or discretionary items.
Failing to have contingency plans for alternative sources of income when the going gets tough can have a serious financial impact on your business if the major sources of your income fold.
Q.
What strategies should businesses put in place?
A.
There are different strategies for small businesses in each risk group but the most important thing to do is not to put your head in the sand and hope it will go away. You need to plan, plan, and plan some more.
If you are faced with a sudden financial crisis, the first step to take is to seek professional business advice. The investment will be worthwhile. Then work out your cash position. Cash is the fuel that keeps the business going so it is essential to concentrate on your cash flow and to keep paying your bills.
You should be preparing a detailed cash flow budget for the next 12 months, at least week by week for the first three months. Make sure you monitor your cash flow and check against your forecasts otherwise the exercise will be wasted. If sales don't meet your expectations, you may find that you can't meet your planned outgoing expenses.
The next step is to prioritise your payments by making a list of creditors you have to pay in order to continue your business. You should then negotiate terms to pay others not immediately essential for the on-going business and maintain good relationships with them.
To improve your cash flow situation, stringent debtor control should be put in place. This you can do by shortening the collection period, chasing debts as soon as they are overdue and by offering small incentives for prompt payment.
Maintaining confidence and goodwill with your creditors and customers is important. You should reassure them of your ability to get back on track and to keep them informed of any changes in your situation.
If you are experiencing difficulties in meeting expenses, see your bank and discuss financing strategies.
Once the position is stabilised, you can consider strategies to minimise costs without detriment to your business, and to maintain or increase sales.
Q.
What should small businesses do to minimise their costs?
A.
'Cash is king' so cash flow is vital to a small businesses' survival but temporary cost cutting measures that damage relationships essential to the long-term performance of your business are not the answer to increasing cash flow.
Don't allow stress associated with external factors such as work pressure and market uncertainties distort your views on key relationships, whether they are your partners, suppliers or customers.
One of the first steps to take in reducing costs is to review your expenses. But, be aware of potential problems if your product or service quality falls.
The next area to examine is your inventory. Understand turnover levels and what they actually mean. Areas of inefficiencies you can improve on are your stock levels (are they too high?), type of stock (are they slow moving?), turnaround times (can you reduce them and in doing so, reduce the amount of cash tied up in inventory?).
You should also examine your policies on holding consignment stock. If you import stock, you may find costs increasing and you will need to review your stock levels or look for alternatives.
Implementing good inventory controls allows you to minimise costs as you will be aware of what stock is moving and what is not. You can better manage your stock by perhaps buying small quantities or introducing just-in-time inventory strategies where the supplier holds stock until it is needed.
Other actions you can take to minimise outgoings include eliminating wastage in all areas of operation. You may want to review capital purchasing budgets or perhaps undertake work previously outsourced where possible and cost effective to do so. Staffing is usually a major expense and a valuable asset so should be looked at carefully, however be mindful of all employment conditions.
The old adage 'You have to spend money to make money' often applies. Do not cut costs if it is going to jeopardise your business prospects of winning new or potential customers. In the first instance, you may want to suspend all but essential advertising while you review the situation.
Q.
Financing?
A.
This is the time when the investment you have made in developing a good relationship with your bank should pay dividends. You should enlist your bank's help when reviewing your financing arrangements.
To ensure that you know where you stand financially, review your financial status to determine if you have reached your limit and if you have personal reserves.
Meet with your bank to discuss ways of meeting your commitments during your period of difficulty and ask your bank to consider options such as paying interest only for a period, increasing your overdraft or funding facility or consider some asset liquidation.
You should also negotiate with your bank to ensure you have the funds you need at the most favourable rates and examine your working capital arrangements.
In addition, you should investigate alternative sources of funds such as factoring, or the use of corporate credit cards for business purchases. As long as credit cards are paid on time, this can be an effective form of credit.
Q.
Staffing?
A.
Knee-jerk cost cutting never really works because the delayed effects of gearing up into recovery of the next growth period can never really be timed to perfection. This is doubly important when dealing with staff as they are a valuable resource of your business and the long-term costs of replacing good and experienced workers can be high.
So, when considering staffing requirements during difficult times, you should talk to your staff about your financial situation and seek their suggestions. If necessary, you may wish to explore temporary cost cutting measures such as leave without pay, reduced hours and alternative duties. You should consider all options and ensure that you meet any obligations in contracts, awards and enterprise agreements. In fact, you should review the entire HR policy of your business.
Q.
What should small businesses do to maintain sales?
A.
Businesses should focus on the positive and work to maintain or increase sales. Turmoil can often lead to new opportunities and markets and you should be thinking laterally about your business. Talk to your customers, suppliers and competitors and keep an eye on the market.
Continue good communications with your existing customers and work hard to keep their business. Any spare time you have, you should spend in over-servicing your best customers.
Be careful when you start discounting to counteract your competitor movements. If your competitors begin discounting to win customers, you should calculate the break-even point on products before following suit. And if you are offering a discount to your customers, estimate the time period you could afford to discount to hold your customers.
Review your advertising strategy. A review of your customers result in changes to your current strategy. You may want to look for alternative avenues or see an opportunity to increase sales.
Your focus should be on increasing or maintaining margins. You may find it is worthwhile to increase prices (if you can do so without alienating your customers) to cover a drop in turnover.
Q.
What other options should small business consider?
A.
Planning ahead builds flexibility into your business and allows you to respond quickly to a crisis.
You should try to limit your exposure to future business risks by adopting several pro-active measures. They include gaining permanent cost savings by becoming more efficient in the operation of your business, and having adequate insurance such as public liabilities, income protection, professional indemnity, WorkCover and superannuation (if nearing retirement).
Every business should have a unique proposition, a feature that makes it different from its competitors. You should identify and exploit your business' competitive advantage.
Your marketing strategy should be reviewed for opportunities to increase sales. You can survey your best customers to see if they need new products or services, or watch your competitors closely in case there are opportunities to increase your market share.
The Ansett collapse has taught many businesses an important lesson, which is to minimise exposure to one supplier or customer by ensuring that your client base is diversified.
If you are in dire straits, try to develop alternative strategies by finding different solutions to problems.
And for those hard times, put aside cash resources to survive a period of financial crisis until your contingency plan is brought to fruition.
The source and certainty of your business revenues are vital to the future viability of your business.
If your business has not yet suffered a loss in sales, you should examine your exposure in the coming months by looking very carefully at your client base to determine your sources of revenue and then, to examine your clients' sources of revenue.
The next step to take in reducing risk to your business is to assess your clients' risk by conducting a client risk analysis. Firstly, group your clients into industry groups or consumer types. Then assess the impact of local and global situations on each group before drawing a risk matrix by determining the likelihood of impact and the effects of impact on your clients.
You then rank your clients according to their risk of exposure, from most likely at risk to the least. The final step is to plan strategies to deal with each group.
