In today's blog I bring you finance tips for surviving the recession based on information from the Institute of Chartered Accountants in England and Wales
In the last week it has been confirmed that the UK economy stagnated in the second quarter of 2008, the third quarter is expected to show a decline and the Chancellor of the Exchequer, Alistair Darling has warned that the UK could be heading for the worst downturn in sixty years.
While I have looked at these tough times from a marketing perspective and how businesses can find the right advice, I have not shown how you need to be taking a stronger control of your finances, other than issue a general recommendation to find a part time finance director if you have 15 to 20 employees or more.
Smaller businesses need to turn to their firm of accountants for help on cash flow management and improvement, cost control and bank negotiations.
Clive Lewis, the Head of SME Issues at the Institute of Chartered Accountants in England and Wales has identified ten tips on how to survive the credit squeeze which I repeat below with my thoughts underneath.
Finance Tips For Surviving The Recession
- Put cashflow and financing on the agenda for every management meeting
You do have management meetings don't you? If you are too small then I'd still recommend that you set aside a review period every month where you can reflect on your business, its recent performance and your expectations for the next few months.
Identify actions that you can and will take to improve and record them and schedule them into your time planning system.
- Regularly update cash-flow forecasts
This is especially critical if you have a seasonal business (e.g. many retailers build up to a Christmas peak) or if you have to make large occasional cash payments.
- If there is a conflict between profitability and cash-flow take the cash-flow option
This may be difficult to do but remember the business stops to trade when it runs out of cash and can't meet the next payroll or satisfy creditors demands for payments of essential supplies.
The only time to excuse yourself on this is if you have big cash reserves (lucky you) or if you have done your cash flow forecasts and you take a look at the incremental changes for this project and it shows that the cash flow requirements can be comfortably covered.
How quickly will you get your cash back from the profit? Investing in extra working capital for a few months is one thing, investing in fixed assets with a payback of three to four years is entirely different.
- If you have a term loan or overdraft be aware of any covenants and constantly monitor how close you are to breaching them
Covenants are the rules that the banks attach to bank borrowings and are based on a series of controlling financial ratios based on interest cover (profit divided by interest cost), gearing (borrowings divided by shareholders funds) and similar ratios.
If you just have an overdraft limit, I find it useful to monitor the best, worst and average overdrafts each month because troubled companies will see the numbers all edge closer towards the overdraft limit.
Your bank manager is looking at this type of statistic and you don't want him or her to know more about your borrowing trends than you do.
- Prepare thoroughly if a review is coming up on any of your financing facilities
Banking relationships may have been quite cozy in recent years if your performance has been good and the banks have had a relaxed lending policy.
With the coming recession, your performance may dip sharply. I've told the story before but I was astonished how quickly profit disappeared in the early 90s recession.
My sources at the banks report that funds are still available so the credit crunch has not restricted availability but lending terms are likely to be tougher, both in terms of interest premiums and security requirements.
Since proper preparation prevents poor performance, if you put in the effort to demonstrate that your business remains worthy of bank support and your case remains strong, there should not be a problem.
However since a key bank criteria for lending is confidence in the management, poor preparation for the review meeting is likely to be damaging.
- If limits might be threatened "think the unthinkable" regarding the sale of assets
Anything that you are not using which has value can be sold and you can expect higher prices early in the recession than when there are many bankruptcy and liquidation sales.
Also look at assets where you are only using a fraction of the capacity. You may be able to generate cash and save costs by selling the asset and outsourcing the service.
- Talk to current financiers before you get into difficulties. Otherwise you devalue future forecasts
When is the worst time to talk to your bank manager? When you are already in the crisis and you haven't provided any warnings.
It comes back to the confidence factor in management. If the bank thinks you don't have financial control and you don't know what is likely to happen, you can expect to have a tough time.
- Make sure that all types and sources of finance have been fully considered
It is often possible to raise extra finance through the specialist asset financing companies that through your main bank, even if they are part of the same financial institution.
Sounds crazy I know but specialists are able to assess the risks better.
- Invest time talking to new sources of finance. You might need them if your current providers prove difficult
I understand the point but this is where I diverge from Clive Lewis, if only in terms of practicalities.
There are only so many hours in the day and if you are spending more time on finance control issues and making sure that your business does everything it can to avoid financial difficulty, where is the extra time to come from?
From a marketing perspective, I want you to be strengthening relationships with your best customers to take advantage of the "flight to quality" where customers want to have confidence in their suppliers.
It is certainly worth finding out names and contact details through your network of contacts so that you are ready but I don't really see the value for you or the other financiers in spending time in speculative relationship building.
- If you are cash rich draw up a list of ways you could use surplus cash for the longer term benefit of the business
I like this idea and I have no doubt that the recession will bring problems and opportunities.
Clearly there are different definitions of cash rich and you need to have your long term financial forecasts in place otherwise you risk taking action under point ten which with hindsight shows you acted against point 3, prioritise cash flow over opportunities for profit.
So there you have it.
Ten finance tips for surviving the recession.
Do you agree? Are there any other finance tips that you believe should be added to the list?
Update - 6 October 2008 - Problems Of Raising Finance
Following the developments in September 2008, the situation with the credit crunch is much worse than it was when I wrote this blog.
In recent weeks I have been hearing more incidences where finance is now being restricted for smaller businesses and the premiums charged on the interest rate are increasing by 2 to 3% in some cases.
This means that when you are negotiating with banks to renew your existing loans or to increase facilities, you need to be well prepared and to present a professional case. That means understanding banking models like CAMPARI. The ebook recommended in that article is very good for small businesses looking for finance as it puts across the banker's perspective.
While banks are feeling the pain and financial consequences of the recession at the moment, they have such strong bargaining power that they will pass it on to customers.
More Information About Part Time Finance Directors
I believe the part time finance role to be a great secret for many businesses but it is a secret which can make a big difference.
To find out more in general, please read my blog on Part Time Finance Directors.