Managing in a recession
Cash is King is an often used saying and managing cash in a recession is vital. However, so is making consistently profitable sales or there will be no cash to collect.
Faced with the credit crunch, possible deflation and Robert Peston’s cheerful pronouncements on a daily basis, the one thing we cannot do is bury our heads. I therefore recommend that each business creates (or updates) its three key action plans as follows:
Profit Action Plan
How can you improve your profitability without reducing your prices? Customers are more careful in a recession but they should be focussed on value for money rather than absolute price and so should you. What can you do to make yourself a more compellingly attractive option than your competitors and, equally important, how can you let your potential customers know about it. If competitors are struggling, their service levels may be dropping. Now is an ideal time to win business by delivering an awesome service.
Profit improvement can also be driven by operational efficiencies. By this I mean looking at every aspect of the delivery of goods and services from winning the order to delivering the product and making sure that your systems ensure that this is done in the most efficient way every time. Not only does this reduce wasted time and therefore cost, it also means that every client gets the best possible service every time.
Cash Action Plan
The most obvious area to focus on is cash collection. Reviewing your credit control procedures to ensure that you are paid on time is a good starting point and checking that your terms and conditions are up to date in this respect, and known by your customers, is vital.
Depending on the nature of your business, direct debits are becoming popular as they give you control and the actual collection process can be outsourced so it is not an expensive option. For continuous services, consider standing orders to spread the cost but don’t use this if it means giving extended credit periods without interest and security.
Working capital management should also be reviewed. Do you need that level of stock? Can work in progress be invoiced earlier, perhaps in stages?
Invoice discounting can be a cost effective way of raising cash with funders typically lending 80 – 90% of gross debtors. This can release more funds than a bank overdraft.
The Government’s Enterprise Finance Guarantee Scheme is still in its early days but some funding is already being provided. This can be used for a variety of purposes including replacing existing expensive finance or funding asset purchases. Could this be a way to reduce your financing costs?
Producing high quality cash flow forecasts can help avoid nasty surprises and also assist you with evaluating the options available.
Tax Action Plan
Paying tax is bad enough. Paying more tax than you need to is a crying shame at the best of times and potentially disastrous if cash is tight. So your tax action plan should look at the opportunities available to structure your activities in a way that will reduce your exposure to tax. This could be anything from straightforward changes such as the way you pay yourself or the business structure you trade through to the more complex and aggressive avoidance opportunities such as Employee Benefit Trusts.
If you would like further advice on any of the above, please contact Darren Austin.