In our last article we talked about business growth. One benefit of growth is that it gives a business some leeway for when inevitably it is hit with a rough patch.
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| A business is really no different to any human being. The level of fitness needs continual attention, an ailing business needs treatment and if neglected mere survival is jeopardized. |
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Being on top of your numbers means you know exactly how much leeway you are building. How prepared are you to ride and manage a storm? How fit is your business? Will you survive? External pressures have never been greater.
The Global Financial Crisis, the high Australian dollar, increased overseas competition, and general economic downturn are all contributing to the potential demise of small businesses.
When businesses struggle they cease taking on new staff and reduce the hours for existing staff. On the home front, lower wages, rising prices, increased interest rates perpetuate the cycle as families cut out discretionary spending.
So what can be done? The key is to embark on improving ‘business fitness’.
This can be done with careful planning and cash flow forecasts. In its most basic form, planning means charting estimated income and future expenditure.
Some expenditure can be planned for – things like rent, loan repayments and taxes. How does your business fair after fixed expenses are accounted for? Are you prepared enough to be ready for the unexpected?
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Cash flow in business is such an important factor yet we frequently come across businesses who are cash poor. |
Cash flow in business is such an important factor yet we frequently come across businesses who are cash poor. Treat this as your early warning signal. Cash flow problems can be addressed in a few ways.
Firstly, review your stock levels immediately. Stock that is not moving ties up cash – you may need to cut some losses to get rid of obsolete items.
Consider also, are you carrying too much stock? Are your premises too large? Are your storage facilities unnecessary?
Secondly, we come across a few businesses who have huge debtors. If this is your business – start collecting now!
Your struggles could very well be because someone else is hanging on to your money!
Review your collection policies; consider insisting on payment in advance, taking deposits or working out amicable payment arrangements.
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| It may be wise to examine your current branding and marketing strategies. |
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Additional measures to improve cash flow may include negotiating discounts from your suppliers, renegotiating more favourable leases, contracts and loans.
Occasionally, a business may need an injection of cash from external sources. This can be from the owners of the business or some short term borrowing in the form of a loan or business overdraft facility.
Be sure to use this finance wisely – it is a band-aid solution and there may be underlying issues which need attention.
For example, you may have fallen behind in terms of industry trends; it may be wise to examine your current branding and marketing strategies.
Sometimes no matter what steps are taken to try to rescue a failing business the decision may be made to close down.
This is not always the fault of the owner but just caused by a shift in consumer taste and trends. A business closure may involve a sell-off of stock, vehicles and other assets.
There may be an opportunity to sell the business to new owners who, armed with fresh ideas and insights are able and willing to take the business to the next stage. In this case you have potentially a saleable business.
Tax planning should be considered, capital gains issues may arise and timing is important.
Once the decision is made to close a business then personal ‘survival’ tactics are employed to examine potential sources of replacement income.
This may be from Centrelink support, early retirement, a reshuffle of personal wealth, or accessing superannuation.
A business is really no different to any human being. The level of fitness needs continual attention, an ailing business needs treatment and if neglected mere survival is jeopardized.
This newsletter is presented in summary form as a guide only. It should not be relied on as a substitute for detailed advice or solely as the basis for making business or investment decisions.
Images from Microsoft Office