Financial Risk Management in Difficult Times

Despite European debt crisis and following economic downturn, we hear Australia is doing well in its economy. Thanks to mining boom and China. However, when I see our clients normally small to medium sized business owners, majority of them cry for economic downturn and following reduced revenue. So as their accountant, how can I help them?  Apart from answering the question like ‘when do you think our economy will be better?’ the best thing accountants can help you is about financial management skills.

So this week, I am referring CPA Australia’s tips for managing through the tough times.  Here are some tips from CPA Australia.

1. Do a financial health check of your business.

Regular check of your financial position is vital especially in difficult times as it only gives you whether the business you are running is viable and maintains the position for future growth.  Have sometime with your financial statements from your software and do some simple calculation such as liquidity ratios, debt cover ratios and ROI. This will give you the preview of your business performance in these uncertain days of time. If you don’t understand what the ratios are telling you, then arrange a meeting with your accountant. He or she will have no problem to interpreting the numbers and will tell you what to do with your business.

2. Improve your cash flow.

In tough times, it is normally more difficult to collect outstanding debts, but it is necessary you to survive. Please discuss with your debtors in early stage especially if you believe they are in financial risk now. Preparing regular cash flow forecasting will help you to outlook the cash position of your business in short term and long term. Also it could be wise for you if you use full terms of trade with your suppliers or renegotiate with the major suppliers about the payment terms. Having excessive stocks are not a good idea as they are holding your cash until they are sold. Lean management tells you why. If you can sell some NOT-REALLY-NECESSARY assets, sell now if your forecast is telling you that your business will have some tough time. Have a chat with banks or financiers like debtor finance to source your cash needs.

3. Improve or return your business to profitability.

A profitable business is a successful business. Along with sufficient cash inflow, make sure you work for profit with the tips below:

• Prepare regular financial statement to check your performance (what can be measured is more likely to be achieved)
• Focus sales with highest sales margin
• Don’t discount unless you can achieve the same or better gross profit through increased volume
• Control costs
• Be flexible with your staffing

4. Improve your access to finance.

Getting external finance source could be one of the most critical solutions in tough times. Here are some tips how to get external finances.

• Disclose all necessary information required
• Be sensible about the amount you need to borrow and be able to justify it
• Take your time preparing the application as a well prepared business proposition is a good sign of a borrower’s commitment to a prospective lender
• If you fail in your loan application, find out why
• Take time with your accountant first before you apply for a loan. Your accountant may be able to give you analytical preview for the loan application such as current debt cover ratio and may help for the application with better business forecast you missed out

5. Take stock of where your business is at.

• Conduct research to find out if your customers and competitors are also experiencing tough times and if so, how are they responding
• Not starve your business of essential investment
• Review your business operations and look for improvements

6. Revisit your marketing plan.

Your marketing plan must be reviewed and is focused on achieving key objectives to get you through the tough times.

• Focus on chasing sales that have a high margin and bring in the cash quickly
• Reward staff for sales of higher margin products and when payment is received
• Measure the success of each promotional activity or campaign and focus on encouraging customers to pay at the point of purchase or to pay early

7. Adopt appropriate risk management strategies.

Review your business position and conduct risk analysis particularly if you are one of below points:

• Relying too much on a small number of major customers and suppliers
• Selling on credit
• Reduction in demand for your goods and services
• Fraud

8. Take advantage of opportunities.

If an opportunity emerges, take have a look with your business plan and budgets whether you can accommodate it. You may have to change your business plan and re-focus your budget to take advantage of an opportunity.

9. Consider exiting your business.

If you believe that your business will not survive with this tough time, then consider winding up your business. There are several ways of business winding up including selling, passing on the business, merging and closing down.

History tells us some businesses were even better in difficult times than most other businesses. This tells tough time does not always mean business failure. This may be a perfect time to review your business position and take necessary steps for viable and sustainable business growth. Risk could mean another opportunity for businesses.