How to prepare your business for difficult
The key to prudent economic
management is to ensure you remain at the wheel of your vehicle and
keep your lights on. Here are some practical strategies you can
employ now to weather any difficult times for your business.
To diversify or not
There are two different
strategies that are at opposing ends of the spectrum. First up, make
sure all your eggs are not in the one basket. If 80 per cent of your
revenue comes from one major client you have a major risk. Make sure
that if you lose a major client that you have other clients from
which you can bolster your cash flow.
On the flipside, now is not
the time to diversify your products and services. A diversification
strategy is risky at the best of times so unless you have a
compelling reason to diversify, don't.
Growth is not for all seasons
When leaders talk of strategy
they invariably involve growth strategies. Just like the four seasons
of nature, economic cycles rotate through boom and bust, up and down,
expansion and contraction. One of those seasons is contraction. It
might just be prudent to prepare yourself for the rough weather
ahead. You need to make a judgement call on this. If it is time to downsize,
here are some things you can do:
- build a cash flow buffer. The
thing that will kill your business before anything else is cash
flow issues. You may have dozens of things you could do with
your cash but it is highly recommended to hold a buffer, ideally
three months overheads. It will liberate you from the emotional
stresses and strains of market volatility and the flow-on effect
of your clients defaulting on you
- bring forward receipts and
defer payments. Look at ways of having clients prepay, eg. discount, credit facility, retainer,
- reduce debt exposure:
Consolidate your debts and reduce your gearing. If interest
rates go up debt finance will get more expensive. So sit down
with your financiers and proactively manage your debt exposure
- migrate from fixed to
variable costs: This is about two things:
reduce your overhead costs in absolute terms, i.e.
cut costs. All things that are non-core or discretionary go first,
migrate your cost structure from fixed to variable.
For example, you might use contract labour or outsource instead of bearing the
Manage employment leave exposure:
if you have staff with big chunks of leave entitlements encourage
them to draw it down rather than pay it out in a lump sum. This is a
critical element of prudent cash flow management.
Shorten decision cycles:
track your financial performance in shorter cycles. Rather than
preparing monthly or bi-monthly accounts prepare cash flow forecasts
on a weekly basis. This is a great discipline at any time. Most
bookkeepers are adept at cash flow reconciliations and even financial
reporting but the real value they can add is in shortening that
reporting cycle AND shifting the focus to forecasting rather than
just reconciling the past. In an uncertain future the past may not be
a good barometer of the future.
The major change you can make
is to be proactive and stay on the front foot. This is how an
empowered leader leads.