There's a reason we're the Number 1 provider of part-time CFOs

Call us on +852 3059 2506

Recession Survival Tips – Mike Southon

Recession Survival Tips

By Mike Southon

As the recession begins to bite, it is time for some serious soul searching, and the weapon of choice is the spreadsheet. The prime reason that companies go under is not lack of innovation or even customer orders, it is problems with cash flow.

Most companies have an accountant or bookkeeper; these professionals do a good job, but are ultimately reactive, they tell you what has just happened, which might be the discovery that you have been trading insolvently. Companies need to be pro-active in their financial management, and those who do not have a full-time finance director would be well advised to seek out one of the companies who provide those skills on a part-time basis.

I spoke with Colin Mills, Chief Executive of the FD Centre, who provide this service, and asked exactly what their consultants do when they first start working with a business. He explained that the key is financial visibility; many companies ‘fly blind’, a little like leaving the house on a frosty morning and driving off with the windows still frozen.

Businesses need to have an accurate picture of their current performance and what is likely to happen over the coming months, particularly profitability and cash flow. Mills explained that many entrepreneurs consider regular management reporting as an unnecessary distraction, only of interest to their bank.

He gave the example of a client who had secured a major contract with a large blue chip customer, but the FD Centre’s analysis showed that the business did not have sufficient money to actually complete the contract and would soon be bankrupt. Fortunately, they were able to help sell the company to a better resourced enterprise that wanted the contract; the entrepreneur was delighted with his exit and has since gone on to start up a new business in a related field.

Hard times will also put enormous pressure on management and staff to manage the changes that are required to get through the turnaround period. Entrepreneurs need to look at the skills and determination required to perform key roles and implement the necessary changes while ensuring the staff buy into the process.

Not everyone will have the stomach for the fight, remaining part of the problem rather than part of the solution. Sadly, downsizing is an inevitable part of any downturn, and few entrepreneurs have the personality or experience to cope with what will be one of the toughest times of their lives. My experience is that many outsourced finance professionals also work closely with the equivalent human resources organisations, which can help deal with the emotional issues as well as the inevitable legal minefield involved in making staff redundant.

Once the cash-flow and resourcing issues are addressed, Mills then recommends a radical review of the profitability of your products and services. Key metrics are the sales volumes that each product generates, your stock requirements, the gross profit of each item, and the commercial terms with both your suppliers and customers. You should then rank the products in order of their ability to generate profit and positive cash flow.

Having identified your best products you should then examine whether your sales and marketing approach needs to be refined.  Mills gives the example of a travel industry client who reduced their product offering down to a narrow niche, cruises, and then focused its marketing effort and management time on ensuring these were profitable and generated cash quickly.  While there was a temporary fall in sales, the company returned to positive cash flow and profit within a matter of weeks.

Finally, Mills recommends looking at your supplier relationships, and if necessary, to re-negotiate terms. Many businesses fail to develop effective procurement skills or seem have forgotten how to use them, a skill that is essential during a recession.

The FD Centre had a client recently whose main suppliers were demanding up-front payment, while their customers were looking to extend terms; the impact on cash flow was dramatic.

Mills recommends up-front investment in negotiation skills. Contrary to popular belief successful negotiators are not aggressive; they are patient. You should ask your suppliers and customers to generate a list of their requirements, and you should draw up your own.

Once these are documented, it is possible to “trade” for mutual benefit, and this should always be done in an open and honest environment. Nobody really wants to lose a trusted supplier or value customer, so it is worth the investment in skills and expertise to maintain these key relationships.

 

This article Copyright CMike Southon 2009 All Rights Reserved
Not to be reproduced without permission in writing
Originally published in The Financial Times
Mike Southon can be contacted at [email protected], www.beermat.biz

 

fd-heart

Book in for a free financial health check

Book Now
fd-stars

Rate your company finance function in nine minutes

Take The F Score
fd-speech

Do you have a burning finance question? Ask one of the country’s top CFOs now

Ask The CFO
fd-money

Book yourself in for a complimentary 30 minute finance breakthrough session

Book Now