20 Strategies to Strengthen your Business in Challenging Times
Back to Basics
1. Understand Your Business
All businesses have some form of internal management information system, starting with basic, timely financial information and reporting. Ensure financial reports are produced monthly or more frequently, study them, and know the key drivers for your business. Identify ratios or indicators for your business and know what is optimal, whether that is turnover, profitability or investment in current assets. To help you keep track of developments, set them up on a “dashboard” and monitor them weekly.
When there are changes, it is important to understand why the changes are occurring and consider all of your options for dealing with them. In various sectors of the economy, there may be pressure to reduce prices. Monitor the prices you are paying for inputs and ensure you are obtaining the most favourable price and terms possible. Monitor your margins, and don’t “buy” yourself into trouble by paying too much or charging too little.
Once an issue comes to light, identify a solution, implement it, and monitor the impact. If one course of action doesn’t work, be open to additional options. By being in touch with your business basics you will have the opportunity to stay on top of things. People who work in your business and have responsibility for a functional area should know what is going on and be able to provide you with a good indication of how your business is doing. Leverage their expertise so you understand the financial reports and indicators.
2. Ensure Your Business Plan Is Current
A business plan provides a business with direction by establishing goals and setting the course to get there. The plan should be flexible so you can adapt to the changing market and remain competitive. Communication is key to ensuring the plan is well understood by your employees and management team. Once communicated, getting them involved helps to ensure the plan happens. The plan should focus on establishing realistic goals, monitoring its progress and making the necessary changes as you move through it. A plan is a work in progress that should be constantly re-evaluated. A clear vision assists a company in taking advantage of opportunities that will help it achieve its goals. Your plan should take into consideration your marketplace, to ensure your capital structure is optimal, and strengthen your business.
3. Do a Financial Health Check
A financial health check is a series of pointers designed to spot potential problems before they get out of control. Identifying areas of concern may not mean your business is facing financial difficulties, but it is a catalyst for you to look closely into your business. Explore areas of concern so appropriate solutions are put in place before your business is in jeopardy. There are core triggers that are crucial indicators that a business may be facing financial difficulties, including:
- Losses, whether actual or anticipated, leading to an accumulated deficit;
- Breach of banking or other financial covenants, whether actual or anticipated;
- Late payment of sales or payroll taxes;
- A going concern note in the financial statements;
- Loss of a key customer;
- Debts to trade creditors over 90 days old;
- Exodus of senior management or key employees; and/or
- Bank or lender’s workout group appointed to manage accounts (“Special accounts”).
Any of these indicators should cause you to immediately seek advice. Restructuring and insolvency is a specialty area, and many accountants and lawyers have minimal exposure to the relevant issues.
4. Watch Your Cash Flow
One of the first signs of difficulty is a constriction in cash flows. It may be that formerly prompt payers are now stretching receivables. Some customers do this formally by announcing a change in their payment terms. Others do it because they are struggling with cash flow and the result is an extension in payment terms.
Monitor receivables and payment behaviour closely. Document policies for your receivables staff so they know what the expectations are and when additional actions are required. Businesses are not banks, and do not have security for the money that companies owe them. Ensure your customer information is complete. It is difficult to collect money from a customer if you don’t know who they are.
For new credit applicants, have a complete credit application on file. Obtain current financial statements and references, then check everything – twice. Sometimes people come to a new supplier in challenging economic times because they ran out of credit elsewhere or have lost suppliers. For new applicants, consider a personal guarantee or other security.
Finally, be aware of standard practices for your industry. Review any applicable industry legislation (i.e. Construction Lien Act, PPSA) to ensure your business practices allow you to access legal protection if needed.
5. Ensure Your Business Is Properly Capitalized
The right kind of financing at the right time can be critical throughout many stages of the life cycle of a business. In addition to traditional banks and credit unions, many other sources of financing are available. Some of the common reasons for financing include:
- Debt refinancing;
- Desire to grow and expand;
- Acquisition of a competitor;
- Replace old equipment; and/or
- Management buyout.
Identifying alternative sources of financing and/or possible debt restructuring opportunities are critical elements in this process. Sources of funds that can assist you may include:
- Leasing;
- Factoring of receivables;
- Asset-based lending;
- Subordinated debt;
- Private equity; and/or
- Venture capital.
Some of these sources of financing involve more time, costs and coordination, but can be very beneficial alternatives. Proper capitalization provides many advantages and opportunities that might not otherwise be available.
6. Plan Ahead
Even if your business is not in difficulty now, it is always useful to review the structure of your business ownership, assets, family holdings and other matters to avoid unintended consequences. Once business problems become personal obligations, whether as a result of exposure through a guarantee of corporate debt or exposure to any of a wide variety of liabilities that accrue to directors, it is often too late to restructure and protect assets. If you are considering putting personal resources into a business, consider taking security to protect your opportunity for recovery.
Planning ahead for your business requires a comprehensive approach. Some strategies that work for one area of business may not benefit another. For example, what may be optimal for income tax purposes may not be optimal if there is a risk of creditors holding owners or directors responsible for corporate obligations. Seeking expert advice provides you with a full understanding of what is possible.
Next section: Taking Care of Business
