The business world has changed dramatically and perhaps forever as a result of the coronavirus pandemic. Even with the various financial incentives available in the government’s stimulus package, survival has become the primary focus. ASIC have identified the top five reasons businesses fail – the first being a poor strategy, the other four all relate to the financial management of the business. Given no business strategy could cope with what we are currently experiencing – let’s consider the other four (in order of importance).
It is no surprise the Qantas share price jumped up recently upon an announcement that they had secured access to over $1bn in standby credit. Sales is vanity, profit is sanity, but cash is reality! But you don’t need to borrow to improve cash flow: – collecting what is owed, deferring what you owe, reducing inventory, outsourcing, debtor financing, capital injections, selling surplus assets and leasing rather than buying are all options to be considered
When Alice in wonderland came to a fork in the road and did not know which one to take she asked the Cheshire cat which one to take. The cat asked, “Where are you wanting to go?” Alice replied, “I don’t know”… “then it doesn’t matter which road you take!” said the Cheshire Cat. Do you have a cashflow and profit budget for the next six months, perhaps on a weekly basis? Then be prepared to monitor it daily / weekly. If not, you may be planning to fail.
As a general rule of thumb, businesses should borrow between 40% and 60% of their assets from third parties, with the balance funded by the owners. In these extraordinary times perhaps the ratios can go a little higher for the short term. This is why it is important to pay down debt when trading is strong, so you can draw back debt when times are tough.
Traditionally profit is generated by increasing revenue and / or reducing costs. In our world today not many businesses have the option of increasing revenue, so the focus turns to reducing costs by improving efficiencies. In a broad sense you can do this by improving the relationship between outputs and inputs:
Identify your top three costs. Reflect on these five approaches, take a blank sheet of paper and build a budget from the ground up (not using what you have previously spent on this cost). Challenge your assumptions along the way. You may be surprised at the result.
Financial Acumen & Strategy Specialist
Doug is a highly experienced Financial Acumen & Strategy facilitator based out of Perth. If you would like to learn more about Doug and his background please visit this link.