Control the bottom line: Key to the long-term success of any business is profitability. While it’s important to ensure that gross margin metrics are being maintained, the bottom-line is where the rubber really meets the road in terms of returns to shareholders and return on investment. Where the business landscape is changing rapidly, businesses leaders should be prepared to review their structure and adjust expenditure to maintain overall profitability.
Cash is king: While profitability is key to long-term success, in the short-term, cash flow management is at the forefront of a business's ability to navigate tough waters.
Top cash flow management tips:
- When budgeting, ensure you’re forecasting your cash flow requirements and think about the “what-ifs” to ensure you understand your potential financial position under different scenarios, and plan what you would do to mitigate risk or maximise opportunities in each.
- Keep a close eye on your debtors to ensure that payments are made as expected. It’s also important to regularly review your terms of trade to ensure they're fit for the current environment.
- Build a strong relationship with your bank and reach out ahead of time when it looks like a cashflow crunch is on the horizon.
- Ensure you are aware of all upcoming payments, including tax. There are several options available to finance or spread tax payments - speak to your accountant or tax adviser to understand more.
- Reach out to your advisers and key stakeholders - your bank, suppliers, and customers. Don't plan in isolation and make sure you are communicating and actively managing the situation.
Manage your stock. Many businesses end up with dead stock on balance sheets. They don't want to sell it at a reduced price as it will hurt their margin and they could make a loss - but how long should you hold on to stock for without cash coming in? What is it costing you in storage and insurance to hold the stock? It may be better to take the hit in the short term to utilise these funds more effectively.
Look at your financials holistically. You should be as familiar with your overall financial picture as you are with your products and services, market, and industry. Review every metric, from net profit and gross margin to expenses, cash flow, and sales. Look at how these combine to build an accurate picture of how your business is performing.
Keep a close eye on debtors to collect cash within reasonable timeframes. Debtors may delay payments to manage their own cost pressures. Look at your terms of trade and, if feasible, consider providing incentives for prompt payment
Refresh your business strategy. The business landscape has changed significantly in recent years, but your strategy might not have. Sit down and examine your business strategy to make sure it still aligns with the reality of today’s operating conditions. Things to consider include what your overall business vision is and how you’ll get there, what your business strengths and weaknesses are, and any potential opportunities or threats.
Stress-test your business plan and financials against various scenarios - including changing technology, environmental concerns, employee preferences, industry trends and consumer habits, among other things.
Keep up the communication with your bank. This will help ensure you have a trade finance facility that works for your business. You will have a stronger relationship with your bank if you can showcase detailed forecasts and up-to-date cash flow reports. Be up front if you are not going to be able to meet your agreements - giving advance notice can make all the difference.
Don’t go it alone. Seek advice from people you trust. Consider establishing an advisory board of experts to provide advice on a regular basis.