Ten financial management tips for tough times
Business Partners Limited data gathered over years of working with South Africa’s business owners tell a fascinating story about business survival.
Figures compiled by Business Partners Limited regional general manager Anton Roelofse show that 34% of businesses failures are caused by poor financial management. Add to that the 12% that fail because of poor record keeping, and it becomes clear that almost half of all business failures could have been avoided had the business owners done something to improve their financial management. In contrast, only 12% of business failures are caused by bad economic conditions. If ever there was a succinct and powerful argument for focussing on your financial management, this is it.
Here are ten ways in which you can survive the tough year ahead through better financial management:
Limit your capital expenditure
It is very easy to over-extend in a weak economy. One can safely say that when a business expands, for example by opening up a new branch, the owner will underestimate the operational difficulty and the cost. When that happens in an economic slump, the results can be fatal. The danger is even higher if you extend into unfamiliar markets or industry. As a general rule, don’t try to expand during an economic downturn.
Of course many opportunities open up during a downturn, not least because many of your competitors may run into trouble. The general rule cannot be absolute, and carefully considered expansive moves always have a place in your strategy. But be very careful.
Don’t cut back on marketing
The first thing that business owners tend to cut back on in times of trouble is marketing, because the results of a business’s marketing effort is less immediate and tangible than, say, production. It therefore seems that a business can do without it for a while. But this is generally a mistake. If anything, when times get tough, a business should increase its visibility in the market.
By all means stop spending on wasteful marketing projects. But your focus on your business’s marketing must become sharper, and you and your team must increase your time and energy on marketing. A good place to place the focus of your marketing effort is with your existing clients. Expand your offer to them. Is there something you can sell them over and above their usual purchase?
Learn about financial management
You don’t have to be an accountant or be trained as a financial director. The most successful business owners know their shortcomings and hire financial experts. But as owner-manager you must be able to understand and use the main outputs of a good financial management system.
For example, do you know what the current assets/ liabilities ratio of your business is? Do you know what it should be? Do you know your debtors turnover, your creditors’ turnover and your stock turnover? Do you have targets set up for these?
If you don’t, it is time to learn the basics. Do a course, read a book or sit down with your accountant or auditor for some learning sessions.
Review your debtor management system
Here is a quick checklist to ensure that your business has robust systems to allow you to sell on credit and survive a downturn. Do you have an efficient:
- Credit vetting process?
- Credit policy – rules of who gets how big a credit limit?
- Proper records of your debtors and their activities?
- A monitoring system to ensure that debtors remain within their terms?
Review your creditors
Remember that times are tough for your creditors too. This means that some are going to clamp down on any further credit, but some may be willing to give you better terms because they need your business. Renegotiate and review your terms.
Keep your promises and be proactive in communicating with your creditors about any payment delays. A creditor age analysis must for part of the financial management documents that you routinely consult to gauge the health of your business.
Check your stock system
Stock is tied-up cash, and in tough times you need to free up as much cash as possible. Keep the minimum stock levels you can get by with. It will require that you know the stock turnover for all your lines, so that you can focus on getting rid of your slow-moving stock, even negotiating to return it or replacing it with faster-moving items.
You will not survive if you do not have a robust stock recording system. And rather keep the keys of the stock room yourself.
Manage your bank account
A core feature of your credit record is how you manage your back account. Stick to your limits and arrangements with the bank, bank all your cash so that your account reflects the true size of your turnover, and be proactive when you see trouble brewing. Let the bank know if an arrangement can’t be met.
Improve your invoicing
A good invoicing system will ensure that your invoices are sent out on time, and has built-in mechanisms to make sure invoices are paid on time and to follow up if they’re not.
Sell unproductive assets
Let go of any emotional attachment to old, unproductive assets or pet projects that didn’t work out. Sell them and use the cash – and space – more productively.
Have a plan system
Every business owner has a plan, some in their heads, some scribbled down on random notes, and some in more formal formats. Somehow, the most successful business owners are those whose plans:
- Include detailed cash-flow forecasts
- Are routinely updated – once a month at least
- Are routinely used, studied and referred to.