If you can keep your cool while economic mayhem abounds, you could set up your business for not just survival, but for greater profit and cashflow when things improve. Here are some money management tips to thrive and survive in the downturn.
It’s all over the news that business and consumer confidence is low and that Australia and other Western economies are heading for tough times. Money is tight and many business sales are falling. This is not good news for many small to medium enterprises, but it can present a chance to take stock and even get the edge over competitors who don’t treat the situation as an opportunity.
This is a time when business owners need to show leadership and retain the confidence of staff and stakeholders. SMEs often have an advantage over larger businesses in that they are able to act more quickly and decisively. Larger businesses often have to contend with office politics and various departments trying to protect their own turf, whereas SMEs are more down to earth.
Just because SMEs can act quickly, it can be detrimental to employ ‘slash and burn’ money management tactics to survive a downturn. i.e. indiscriminately cutting costs without really thinking about how this might impact on the future of the business.
The best place to begin preparing for a downturn is to work towards where you want to be when things pick up again.
- Are there better ways to structure the business?
- What type of customers do you want to work with?
- How will you market/sell your product or service?
- What resources will you need to deliver products and services and how will you deliver them?
- Where will you operate your business from?
- What price and cost structure will exist?
- How will your business be funded? Will external funding be required or will it be self-funding?
Once you have a picture of your ideal business, you can begin to look at the cost of running it and other money management issues. Start with a review of your Profit and Loss Statement for a prior period e.g. for the year ended 30th June 2008.
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When times are good most business owners spend little time worrying about every cent that gets spent. When sales start to fall though, this is the best place to start.
Look at direct costs e.g. cost of products for sale and labour costs. Are there alternatives or better methods of delivering your product or service? Perhaps do some research on the Internet to see how other businesses are doing it.
The next money management tip is to work your way through every line item on the Profit and Loss Statement. Time put aside to focus on this issue can be some of the most profitable time you will spend in your business. It may seem tedious, but when every cent is coming out of your pocket as a business owner, believe me, it’s worthwhile.
I went through this money managment exercise myself a couple of years ago and came up with approximately $250,000 per annum worth of savings. I looked at every single item and thought “How can we do this better, more efficiently and more cost effectively?” Lots of self-discipline is necessary and a little sensible ruthlessness as well.
The important point in relation to cost savings is that every dollar saved is a dollar straight onto the bottom line. Whereas every dollar of extra sales may only be a matter of cents onto the bottom line, because a sale carries with it direct costs and overheads.
Cashflow also needs serious attention during a downturn. Stock needs to be more closely managed to ensure only the stock that is required is purchased. If you are purchasing stock on credit terms you could get a double whammy of reduced sales and collections at the same time as paying for stock that is taking longer to sell.
All of the above may sound like Doomsday stuff, but if you can be realistic and take the tough money management decisions now, your business will be in a much better position when the downturn ends.
Your business will also be in a far stronger position than competitors who haven’t properly managed the downturn or indeed survived it. When the upturn arrives your business could be even more profitable and valuable.
How will you make your business robust enough to thrive through the downturn?