Tips for CFOs in tough times

Develop a financial model

Using a simple spreadsheet, develop a financial model for your business around key operating metrics like revenue, costs, cash, and inventory. Try modelling different scenarios to understand their impacts on the business. Develop contingency plans for each scenario. For instance, you could reduce costs or inventory, minimise the use of cash, source additional funding or seek short-term revenue boosts through discounting. If you are considering discounting, your modelling may benefit from a margin and pricing sensitivity analysis. It's important particularly in tough times that discounting doesn't lead to a reduction in your gross profit.

Keep your financial records current

Consider producing your financial statements more frequently, particularly your cash flow and forecasts. It is extremely important to use reporting and forecasting to manage cash flow.

Update your bank and investors

Talk to your bank about any problems your business is experiencing. Early detection and disclosure will help you and your bankers work out what, if anything, can be done to assist your business. It will give you time to seek other funding sources if necessary. It's also important to be open and honest with investors as an equity injection may be needed.

Monitor prices

Take a proactive view to your pricing and monitor your competitors. You do not want to take a pricing position that means you are uncompetitive. You must also avoid pricing that is unsustainable in the long term.

Concentrate on profitable customers and products

Identify which products, services and customers are profitable and look at how to remove any non-profitable ones. Look carefully at the costs of acquiring new customers and compare this with the cost of developing current but smaller customers that have potential to grow.

Negotiate better supplier terms

Look for improvements in prices and terms with your key suppliers. You could try extending your payment terms, or review pricing. Take stock on consignment or rationalise your suppliers and adopt just-in-time inventory methods 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 can you add to meet changing market needs? Make sure your operational risk management is adequate to reduce productivity losses from poor work practices, fraud and unethical or risky employee behaviour.

Look for possible merger partners or investors

If your business is experiencing difficulty, it may be worthwhile exploring mergers with stronger businesses or seek out an investor. Mergers and acquisitions may result in an injection of funding and expertise necessary for the viability of the business.

Review capital investment plans

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

Update your strategic plan

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

Know the legal impacts 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 either directly or indirectly and exercise this control, they can be deemed to be a director of the company even though they have not been validly appointed.

They are 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 staff, so keep a lookout for signs of stress and be ready to provide support.

If you're looking for some guidance on this important topic, see our wellbeing resources.

Revise risk management strategies

Challenging conditions can expose problems in your business not previously apparent which may threaten your business's viability. Risks include:

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

Operational risk management must be adequate to reduce the risk of losses from poor practices, fraud and unethical or overly risky behaviour of employees. The activities of employees and the risks they take should be managed through a code of conduct. Your code should articulate the business's values supported by sanctions for any breaches of the code. Businesses should seek to hire staff with values similar to the organisation and securing 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 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).