Protecting your Business from Tough Times

The importance of knowing how to protect your investment in the tough times ensures a successful business for the future.

Why is protecting your small business investment so important for any small business?

Simply, knowing how to protect your investment means a successful business for the future.  It is important for the small business owner to strike a balance between pessimism and optimism ensuring expectations are realistic in order to grow their business and protect their investment.  In good times the weaknesses in the business are often glossed over or can be hidden, but when the tough times arrive both strengths and weaknesses surface.  By constantly working on increased productivity and growth you can help reduce or minimise the impact on your business in a downturn.

3 key areas every small business owner should know to protect their investment:

1. Quality Financial Records – for a successful small business good accounting records are imperative.  Up to date, accurate financial records allow the small business owner to make informed business decisions.  They also provide valuable management information to grow your business by monitoring key number indicators.

• Accounting Software – it is important to use the right accounting software to maintain quality financial records.  If the software is beyond your level of expertise and you do not understand double entry accounting principles then you should not try and make financial or strategic business decisions without consulting an Accounting professional.

Quality accounting records become important when you need financial assistance from banks or other investors/lenders or when you may wish to sell your business in the future.  Historical and current data to prove your business performance is invaluable and these people will demand it.

It is the requirement of the ATO that you keep and maintain business records for 5 years.

2. Prepare a business plan – a business plan is essential for the direction of the business to move forward.  It allows you to see what growth you are trying to achieve and what resources and cash flow you will need to get there.  In the tough times, it allows you to reassess your goals for sustainability.  If you don’t have a business plan of action then you are asking for trouble when times get tough as you won’t have a viable resource to identify and ultimately fix any pending problems.

Historical data is important, but you also need to look forward.  Today’s decisions will impact on your future results, so a budget creates a template for the future and one which you can measure your actual results against.  Whilst a budget may be prepared at the start of a new financial year it is also important to keep monitoring this against updated forecasts as what was envisaged 12 months ago may need readjusting based on actual to date.   You also need to be able to react to situations with all your important information at hand, especially when times are tough, as every dollar becomes crucial.

Cash flow is always a big part of any small business.  It is more often than not the reason why so many small businesses fail.  Therefore, understanding where to find your cash savings within your cash flow budget, your profit and loss statement and your balance sheet is the lifeline to any small business.  Whilst it is important to sell your goods and services at the right price to maximise your profits and this is certainly a positive step to a successful business, you can’t spend profits until they are collected.  A positive cash flow is a necessity for any small business.  This needs to be planned with a 12 month cash flow budget to identify future cash shortages.  Your cash flow budget is based on a number of assumptions regarding the expectations of the future performance of the business so these assumptions have to be based on realistic information and known facts such as rental agreements, leases, loans and other contract’s etc in order to make informed business decisions.

Your cash flow budget will highlight your cash position at the end of each month, it will identify any shortfalls, show when major payments are expected and be a useful tool in deciding when an injection of funds may be required to support the business or with careful planning you may be able to time certain payments to prevent the shortfalls from occurring.

3. Know where your hidden cash is –a positive cash flow alone is not enough for survival.  The business needs to be cash flow positive and making profits long term for sustainable growth.  It is important that you have enough cash available to pay all your bills including your employees, your tax liabilities and of course your suppliers.  You need to ensure that you collect your debtors in a timely manner, pay suppliers on time, but not early, reduce your slow moving or excess stock and ensure your invoicing is up to date.  If you concentrate on these core areas then you may have some cash reserves in your bank account.  This may ultimately reduce your interest bill, if you are running an overdraft facility.

3 specific areas to look for your hidden cash:

                                I.            Debtors – unpaid accounts – you need to chase them up.  Ensure you send statements out on time and follow up with requests for payment throughout the month.  If you don’t ask, you don’t receive, often getting pushed to the back of the queue.  A good idea is to print the actual due date on your invoices instead of using the generic current, 30, 60, 90 day terms.  Keep in mind that you are not in the business of ‘bank rolling’ your customers.

                              II.            Creditors – ensure your supplier terms are being met and you are not paying bills before they are due.  Renegotiate supplier terms if practical or investigate alternative suppliers for a better deal.

                            III.            Stock – only purchase new stock to meet demands.  Idle, excess and slow moving stock eats into your available cash.  Don’t just purchase when a salesman puts pressure on you or entices you with discounts, purchase to suit your own needs.  Stock impacts on your working capital and the ability to purchase other items or grow your business.  If you have borrowings your stock levels could be costing you in interest at high rates.  By monitoring your stock turns and producing valuable stock reports you can make informed decisions on what products are your best sellers, what products are slow moving or have become obsolete, seasonal trends, your margins on product lines and your freight into store costs.  Tough decisions have to be made on obsolete stock as they tie up your cash reserves until sold. To sell at a loss is a hard decision to make, but it makes sense to sell at a cheaper than normal rate and turn that stock into working capital and this allows you to spend on better stock choices.  By having excellent stock reports you will be able to determine your minimum and maximum stock levels for your products.  They will enable you to make informed purchasing decisions of what, when and how much to order and minimise poor choices.  With excellent stock records you will have the knowledge of your purchasing from suppliers which can give you some bargaining power when it is time to renegotiate prices and terms.

Knowing how to protect your investment within your small business by having a realistic business plan, maintaining quality financial records and knowing how to find your hidden cash will ensure your business is viable and primed for growth.  It will allow you to ride out the tough times and prosper by making informed business decisions for your continued success and growth.

At Insight Management Accountants we provide a regular reporting package as part of your business analysis which includes essential information to ensure the growth of your business.  At Insight Management Accountants we are passionate about the success of small business.  Contact us today to discuss how we can help grow your profits and add value to your business.

IMPORTANT DISCLAIMER:  This article does not constitute advice.  This article is to be used as a general guide for our clients for their own private information.  Clients should not act in isolation or solely on the basis of the material contained herein. We therefore recommend that formal advice for your situation be sought before taking action in any of these areas.

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