Tips for managing through tough times

Perform a financial health check

You should regularly analyse the financial position of your business to determine if it remains viable and is positioned for future growth.

You can get a lot of information on the financial health of your business and how it's performing by analysing your financial statements using financial ratios such as liquidity ratios, solvency ratios, profitability ratios, management ratios and return on investment ratios.

Informal indicators such as the value of daily sales, the value of pre-orders or the turnover of a key stock item can also be indicative of how the business is performing.

You will get an understanding of the financial health of the business when you compare current ratios and indicators with historical ratios and indicators and with your competitors.

Improve cash flow

The most significant challenge most businesses face during a downturn is poor cash flow.

Actions to help improve cash flow include:

• collecting outstanding debts
• preparing regular cash flow forecasts
• skewing promotions to products and services that can be turned into cash quickly
• measuring and rewarding staff behaviour that improve cash flow
• making full use of your terms of trade
• managing personal drawings from the business
• reducing stock levels
• replacing slow-moving and obsolete stock with stock that has a faster turnover
• selling unnecessary assets
• seeking finance on reasonable terms from external sources.

Return to profitability

A profitable business is generally a successful business. So you should aim to be profitable when taking action to improve the cash position of the business.

Some ideas to improve or return your business to profitability include:

• preparing regular financial statements
• focusing on high-margin sales
• avoiding discounts on low margin products and services
• avoiding discounts unless you can achieve the same or better gross profit through increased volume
• controlling costs
• being flexible with your staffing arrangements
• chasing only profitable sales.

Improve access to finance

All businesses need finance to operate and grow. Finance can be provided from debt, equity and internal sources.

Some ways to improve your chance of securing finance include:

• disclosing all necessary information the bank requires
• seeking finance as soon as possible and shopping around for the best offer
• being sensible about how much you need to borrow and being able to justify it
• taking your time to prepare the application as a well-prepared business proposition is a good sign of a borrower's commitment to a prospective lender
• asking why your application is rejected.

Assess the current state of your business

In tough times, you should adopt a risk management mindset and assess your business performance holistically.

You should:

• conduct research to identify if your customers and competitors are also experiencing difficulties and if so, how are they responding
• continue to make essential investment in your business
• review your business operations to find improvements.

Revise your marketing plan

In a downturn, there is generally less money available for marketing, so it's important to revise your marketing plan so it is focused on achieving key objectives. This will help to improve your cash position and profitability.

Ideas for a marketing plan in tough times include:

• focusing on high-margin sales that bring in the cash quickly
• rewarding employees for selling high-margin products and when payment is received
• avoiding discounts unless it leads to a better gross profit through increased volumes
• measuring the success of each promotional activity or campaign
• encouraging customers to pay at the point of purchase or early
• using in-store signs to highlight a special or high-margin product.

Adopt appropriate risk management strategies

Tough times may expose the business to internal and external risks that were not previously apparent and may threaten its viability.

Such risks include:

• relying too heavily on a small number of large customers
• relying too heavily on one supplier
• selling on credit
• reducing demand for your goods and services
• fraud.

Other commercial considerations

Other commercial issues to consider during challenging conditions could include:

• your terms of trade and other contractual issues imposed on customers
• breaches of debt covenants, value of security and personal guarantees provided to secure finance
• Whether the action taken to protect your assets remains effective
• reducing the size of your workforce, or reducing hours.

Be opportunistic

Don't turn a blind eye to emerging opportunities that are consistent with your strategic direction and can be properly funded.

If an opportunity does appear, you may need to adjust the business plan and budgets to exploit it. In other words, when times are tough, you may need to drop activities from your business plan and re-focus your budget to take advantage of an opportunity.

Consider exiting the business

Most businesses will trade through tough times: some will have greater success than others. But, some will not survive. There are several ways to wind up a business.

For information on the consequences of insolvent trading, read the insolvency guide for directors from the Australian Securities and Investments Commission (ASIC). Your accountant or lawyer can also explain the risks to you. CPA Australia has a guide to exiting your business which may be useful.