Business Management Articles
Back to Business Basics
Mark Smith
Enterprise
July 2009
It’s amazing how quickly things can change. Only a year ago, the Canadian dollar was higher than the US greenback. Stock markets were soaring. The economy was growing.
A year later, we’re doing business quite differently.
Coping with the ups and downs of today’s markets requires adjustments to business focus and strategies. This is the time to go back to basics and take stock of what needs to change in order to navigate your company away from dangers and toward opportunities.
Update Your Business Plan
A business plan is essential during a recession to determine realistic goals and to provide direction for a company’s team. If an enterprise should require financing, lenders will also expect to see a current business plan.
Review your plan and update it to reflect today’s economic situation. Revisit your strategies and focus on the core products and services that are driving revenues. Communicate this plan to the management team and employees so they know what they must do to realize goals. Then regularly assess progress and adjust the plan as needed.
Monitor Financials
Close monitoring of financials is essential in order to know where the company stands, to flag any emerging issues and to make informed decisions.
Ensure financial reports are produced on a timely basis at least monthly. Study them to determine whether the company is meeting its financial goals and to identify key shifts or trends.
Supplement this analysis by evaluating financial ratios or indicators. Determine the key indicators for your business, know what is optimal and track developments by setting them up on a “dashboard” for easy monitoring.
When there are changes, it is important to understand why these are occurring and to consider all of your options for dealing with them.
Watch Cash Flow
The main cause of business failure during an economic downturn is running out of cash. While falling sales are an obvious contributor, customers that delay payments or fail to pay can precipitate a cash flow crisis.
Cash flow management should therefore be a top priority, including close monitoring of receivables and payment behaviour. Document policies for receivables staff so they understand expectations and when additional actions may be required. For new credit applicants, secure and meticulously check financial statements and references and consider personal guarantees or other security to further reduce your risk.
Review Spending
Carefully track costs/sales and determine whether any expenses could be eliminated, reduced or extended without adversely impacting operations.
With pricing pressures prevalent today it’s also important to monitor margins and the prices of inputs. Investigate whether you are obtaining the most favourable price and terms possible.
Anticipate Financing Requirements
Accessing capital is challenging right now, so ensure that your business is properly capitalized. Stay in close contact with current lenders and keep them informed about the health of the business. If at some point you require concessions or additional capital, provide lenders with lead time to assess the situation and inform them about the steps you are taking to address challenges.
Months ahead of agreement termination dates review loans, leases or mortgages to determine whether they represent the most appropriate forms of financing for the company’s needs in the coming months and years.
Put a backup financing plan into place in case a lender reduces your company’s borrowing capacity or decides not to renew a loan or line of credit. Identify alternative sources of financing or debt restructuring opportunities. Consider leasing companies, receivables factors, asset-based lenders, commercial finance companies, private equity investors and government-backed financing initiatives such as the Canada Small Business Financing Program. The 2009 federal budget increased the maximum eligible loan amount for this program to $500,000. As well, the federal government raised the limits for authorized capital of the Business Development Bank of Canada and Export Development Canada.
Protect Assets
It is wise business practice to develop an asset protection plan in the event of an unanticipated event that might cause financial catastrophe. Some strategies to consider might include for example, creating a partnership or shareholder agreement; establishing a holding company to own the assets required to operate the business or to receive surplus income; protecting a personal financial investment in the business with a security agreement; and placing valuable personal assets, such as a home or investments, in the name of a family member who is not a director or guarantor of the business.
Watch for Trouble Indicators
With the basics in place, your company should have more flexibility to weather business ups and downs. Now it’s a matter of watching for signs of financial problems so you can address them before they escalate into a crisis. Following are some key indicators that a business may be heading into serious financial difficulties.
- Losses accumulating as a deficit
- Breach of banking or other financial covenants
- Late payment of sales or payroll taxes
- A going concern note in the financial statements
- Loss of a key customer
- Debts to trade creditors that are more than 90 days old
- Exodus of senior management or key employees
- Bank or lender’s workout group is appointed to manage the company’s account
These warning signs require immediate corrective action. Consult with a restructuring professional who can assess the situation, identify potential solutions and develop an action plan. Seeking professional assistance at an early stage affords more options –– such as strengthening the core business, restructuring operations, refinancing or negotiating with creditors.
While you can’t control the markets, you can focus on those aspects of your business that will make it successful. This is the time to reevaluate your position and to adjust plans and stratgies in light of the changing marketplace. Getting back to basics could make a vital contribution to the financial performance of your business.
Mark Smith is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps businesses succeed. You can reach Mark in the Mississauga office at (905) 270-7700 or marksmith@bdo.ca.
