Business Management Articles
Keep Your Business Strong When the Economy Isn’t
Mark Smith
The Brampton Guardian
Some days there’s good news: the Canadian dollar is up; the employment rate is stable.
And some days there’s bad news: more layoffs in the manufacturing sector; lenders are tightening credit.
With economic upheaval impacting businesses worldwide, proactive financial management strategies can provide safe shelter. Following are suggestions that can strengthen your enterprise and help you safely navigate through these turbulent times.
Anticipate
Don’t risk being caught off guard. Take the time to forecast your financial situation in order to anticipate potential problems and plan possible solutions. Every quarter prepare best and worst case scenarios for profit and loss forecasts, projected balance sheets and cash flow forecasts.
Then keep a close watch on the financial health of your business. Check financial statements every month and compare them with projections. Monitor the balance between cash inflow and outflow in the cash flow statement. Look for significant shifts in sales, gross profits, expenses or net profits in your income statement. And review the balance sheet for changes in liabilities or net worth.
Reduce spending and debt
This is a good time to preserve cash. Review expenses every quarter and consider eliminating any that don’t directly add value to your operation. Also, be cautious about taking on any new expenditures accompanied by a long-term financial commitment.
If you are carrying expensive debt, look for opportunities to reduce this. Can you pay off any loans, for example, by selling redundant assets? Or can you reduce loan interest rates by extending the repayment schedule or selling assets and leasing them back?
Secure contingency cash and financing
Protect your business from a cash crunch by building a cash reserve. You can make regular deposits in a savings account or low-risk investment vehicle or secure an overdraft line of credit at your lending institution.
Lenders are tightening credit and accessing affordable capital is becoming more challenging for certain businesses and industries. So spend time now, before you need extra funds, to research your options: financial institutions, leasing companies, factors, private investors or others. Ask for commitments in writing and keep in touch with existing and potential lenders so you can quickly access funds if needed.
You might also want to ask suppliers for extended terms in order to preserve cash. And consider accelerating receivables by offering discounts to customers for early payments.
Protect your assets
Don’t risk losing assets that have taken you years to acquire. Safeguard your business and personal funds, property and investments by implementing protection strategies such as the following.
- Incorporate your enterprise to limit your personal liability for business debts and obligations.
- Establish a holding company separate from your operating company to own the assets (real estate, equipment, trademarks, etc) required to run your business. If the operating company experiences financial problems, the assets in the holding company would be protected. You can also set up a holding company to receive surplus income generated by the operating company.
- Protect your personal financial investment in your business with a security agreement; this would give you a priority claim above unsecured creditors.
- Minimize personal guarantees for business loans. Rather than guaranteeing the full amount of a line of credit, for example, negotiate with your lender to reduce the amount the guarantee covers and/or the length of time it will last.
- Place valuable personal assets, such as your house or investments, in the name of a family member who is not a director or guarantor of your business.
- Protect your retirement funds by holding Registered Retirement Savings Plan contributions in an insurance policy, contributing to a spousal RRSP (if your spouse is not a director or guarantor of your business), or establishing an Individual Pension Plan or a Retirement Compensation Arrangement.
Be alert to red flags
This is the time to be vigilant in flagging any emerging financial problems. Be on the lookout for changes in profitability, liquidity or efficiency by monitoring the following ratios every quarter:
- gross profitability
- net profitability
- costs/sales
- debt/equity
- inventory turnover
- current assets/current liabilities
- average age of payables and receivables
If you notice significant shifts in these ratios, you may need to take immediate corrective action. Consult with your professional advisors to determine the best options.
Within a turbulent economy, it’s more important than ever to adopt financial management strategies that strengthen your business. Implementing these suggestions can help to keep your business strong even when the economy isn’t.
Mark Smith is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. You can reach Mark at (905) 270-7700 or marksmith@bdo.ca.
