They say that sometimes the last thing a fish sees is the water it swims in. The same can be said of business owners. The last few months, with the credit crunch biting, have brought with them a full blown recession. The challenge has turned from being profitable to simply surviving in many cases, which means that it’s been easy to ignore some standard business practices that could help your competitive position. Company and personal insolvencies have sky-rocketed and look likely to increase over the year to come.
As the heads of the largest national economies met at the G20 summit to see what steps can be taken on a global level to help rebuild the confidence in the world economy, the same type of analysis is needed right down the line, ending with individuals looking at what they can do to help themselves.
Taking some simple measures to spring clean your business will give your company the very best chance of showing the green shoots of recovery. Not only does it focus the mind, but it gives clarity to the overall business strategy enabling you to cut costs where necessary.
They say tidy desk, tidy mind, so going forward what are the key measures you can take to spring clean your business and get it in the best possible shape for the trying months ahead?
1. Make sure budgets and forecasts are watertight. You need a profit and loss budget which forecasts sales and expenses for the coming period and a cash flow forecast showing the movements of cash in and out of the business. Be neither optimistic nor pessimistic, but realistic. This isn’t the time to be gilding the lily to make yourself feel better but equally, things may not be as bad as you fear.
2. Once you have completed the above, scrutinise your budgets to see what you really need to spend and consider the returns generated for each activity. Get fresh eyes to review budget expenditure (external consultancy or ask your accountant). It will be worth spending money on an expert if they can cut costs you haven’t thought of. Perhaps you subscribe to industry press. Do you need to? Can you reduce costs on entertaining, property or stationery supplies?
3. Do a thorough turnover analysis to monitor where your profits come from. Are you doing things that yield a low profit? What delivers the best return? At all times, think profit not turnover. Too many businesses are preoccupied with turnover when it’s profit that counts.
4. Improve lines of communication with all your sources of finance. Good communication is absolutely vital in times of economic distress. Look at all your sources of finance and make sure you have a good working relationship with everyone involved, including the bank manager. Make sure you know the terms and conditions of any finance arrangements so you are aware when your overdraft needs renewing or you have to renegotiate a loan agreement. Get sources of finance or banking arrangements confirmed in writing as soon as possible.
5. Ensure you have regular reporting of results. You cannot know too much about your business’s financial position. If you don’t already, assign yourself up to 6 Key Performance Indicators (KPIs) to monitor results on a monthly, weekly or even daily basis. Think about likely measures to use which represent key drivers for your business and only try to measure what you can manage or control.
6. Start preparing regular management accounts. Having this information to hand will enable you to respond quickly to every scenario you might be facing. As a minimum you need to have a profit and loss account and balance sheet for every month or quarter. Remember, while KPIs give you reports about the key drivers of the business, your management accounts show you the overall results you are achieving. And as well as helping to streamline the business, banks may also want to see regular management accounts so it’s always worth having these available at short notice.
7. Tighten your credit control to minimise exposure to bad debts and cash flow problems. If you do not already have the right credit control procedures in place, get these set up so you can collect payments regularly. You should also keep on top of customers’ credit ratings and check the status of new customers or clients you are suspicious of. Consider using an invoice discount facility and re-evaluate your debt management system.
8. Think about your employees. Difficult decisions might have to be made, and the sooner you make them the better. If you have to make any redundancies, talk to an HR specialist. This is not the time to be flouting employment laws. However, it is not all about cutting staff. You may need to redeploy those already working for you and need to consider if bringing in new blood will help the business in the long term. Consider for instance employing a marketing consultant to give you creative inspiration – It doesn’t have to cost the earth and may provide you with than all important USP that will set you apart from your competitors.
9. Review your training costs. Is there a better way to achieve your aims? Training is critical if you are going to keep up-to-date and fulfil your team’s potential, but have a team that is the best it can be, but perhaps you should bring your training in-house, or change training provider.
These are all relatively simple measures but they may make the difference between you riding through the economic storm and coming out the other side triumphant, or becoming another statistic in the mounting numbers of business failures. So start your spring cleaning now and get your house in order.
Paul Webb is tax partner at Robert James, the small business tax specialists.
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