Steer your business through the tough times where strategy is key, and businesses will be looking to you, as CFO for leadership on matters that are critical to business success.

Develop a financial model for your business

Using a simple spreadsheet, develop a financial model for your business around its key operating metrics (for example, revenue, costs, cash, and inventory).  "Plug and play" with different scenarios to understand the potential impacts on the viability of your business of these scenarios and develop contingency plans for such scenarios. These plans could include reducing costs and inventory, cash use minimisation, sourcing additional funding and seeking short-term revenue boosts through discounting. If you are considering discounting, your modelling may benefit from a margin and pricing sensitivity analysis, as it is important, particularly in tough times that discounting does not lead to a reduction in your gross profit.

Keep your financial records up-to-date

Ensure your financial records are up-to-date. In tough times, you should consider producing your financial statements with more frequently, particularly your cash flow statements and forecasts. The importance of cash flow and using reporting and forecasting to manage it cannot be over-emphasised. 

Keep your bank and your investors in the loop

The sooner you talk to your bank about any problems your business may have, the more that can be done. Early detection and disclosure will help you and your bankers work out what, if anything, can be done to assist your business and it will give you time to source other funding sources if necessary. It is also important to be frank with investors for a number of reasons, including that an equity injection may be needed

Watch your prices and those of your competitors

Take a more pro-active view of your pricing approach and that of your competitors. You do not want to take a pricing position that means you are uncompetitive, but you have to avoid pricing that may make your business unsustainable in the long term.

Concentrate on the profitable customers and products

Find out which products, services and customers are profitable and look at ways of removing non-profitable ones. Look carefully at the costs of acquiring new customers, and compare them with the costs of developing current smaller customers with growth potential.

Get the best terms from your suppliers

Look for improvements in prices and terms. For example try to extend your payment terms, review pricing, take stock on consignment, rationalise your suppliers and adopt just in time inventory method to reduce warehousing costs.

Rationalise if necessary

Look at the products and services provided by the different parts of your business. Do you need to rationalise? What is generating the profits? Where is the growth? What do you need to add to meet changing market needs?  Ensure operational risk management is adequate to reduce the risk of productivity losses from poor work practices, fraud and other unethical or risky employee behaviour.

Look for possible merger partners or investors

If your business is experiencing tough times, it may be worthwhile exploring mergers with stronger businesses or seek someone to acquire or invest in your business.  Mergers and acquisitions may result in an injection of funding and expertise necessary for business’s viability.

Revisit your capital investment plans

In tough times, it is tempting and prudent to delay or cancel capital investment. This however may have longer term impacts on the capacity of the business once the tough times are over.

Revisit your strategic plan

In tough times, it is advisable to revisit your strategic plan and amend it to reflect your current situation and your plans to get out of your difficulties. Your amended strategic plan should be reflected in revised budgets.

Be aware of the legal ramifications of taking on directors’ duties

Many businesses in tough times turn to their CFO or external accountant to lead them out of trouble. Where the CFO or external accountant gains effective control (directly or indirectly) over the affairs and direction of a company, that is, they are the controlling mind of the company, and they exercise such control, they can be deemed to be a director of the company, even though they have not been validly appointed. They therefore become subject to the same obligations as a validly appointed director. In Australia this could mean being personally liable for insolvent trading and PAYG instalments not remitted to the Australian Taxation Office.

Take care of your employees

Tough times will also affect your employees, so keep a lookout for signs of stress and be ready to provide support.

Revisit your risk management strategies

Tough times may expose or highlight problems in your business that were not previously apparent (or considered unimportant), and which may threaten your business’s viability. Risks include:

  • relying too heavily on a small number of major customers
  • relying too heavily on one type and source of finance
  • not having alternative key suppliers.

Ensure operational risk management is adequate to reduce the risk of losses from poor practices, losses from fraud and losses from unethical behaviour or overly risky behaviour of employees. The activities of employees and the risks they take should be managed by using of codes of conduct that articulate the business’s values, supported by sanctions for any breaches of the codes. Businesses should spend time selecting employees with values similar to those of the organisation and getting an ongoing commitment to those values.

Be mindful of commercial considerations

Other issues to consider in tough times include:

  • the possibility of tightening your terms of trade and reviewing other contractual issues, such as rights of recovery, with your customers
  • breaches of debt covenants, value of security and personal guarantees provided to secure finance from a bank
  • the possibility of reducing the size of your workforce, or alternatives such as reducing hours.

Consider exiting your business

The vast majority of businesses will manage through the tough times, some with greater success than others. However, some will not survive. For information on the consequences of insolvent trading for entities that are companies limited by guarantee in Australia, visit the Australian Securities and Investments Commission (ASIC).