Getting an answer to this question or some guidance can be difficult for the average SME and so I was delighted to assist in the formulation of free guidance which is now available on line from The Institute of Chartered Accountants of Scotland. Some of the aspects of that guidance are summarised in this article.
Active (weekly) cash management is a fundamental requirement especially in times of difficulty, no matter what size the company is. A cash flow forecast should be prepared and regularly monitored and updated, variances investigated, and the reasons for the variances factored into future forecasts.
Review your contracts and negotiate with suppliers. Discuss how you could obtain reduced prices - by simple changes you may be able to assist in reducing their cost base and share their savings. Review your contracts and make sure you understand their terms, particularly those that apply should anything go wrong. Know your suppliers – are you at risk from a key supplier ceasing trading?
Overheads and utilities
Review overheads and utilities to strip out any unnecessary costs and don’t forget that your staff may have helpful suggestions for reducing overhead costs. Shop around different utility suppliers for special offers or agreed rates. Many businesses have now renegotiated monthly payment terms with their landlords to ease cash flow. Most businesses are now reducing travel costs by using video or telephone conferencing for meetings or if travel is required by significantly changing the travel and expenses policy.
Talk to your staff, give them enough information regarding the financial position and priorities for the business that they can help; ask them to improve their efficiency and effectiveness, and remind them that everyone needs to pull together. Where possible avoid redundancies because you will lose valuable expertise and loyalty; instead staff may be willing to consider reducing their hours or taking unpaid leave.
Dealing with the bank
The rules of business with the banks have changed and you need to know and work within these rules. Keep any covenants under regular review, provide management accounts on time, and do not give the bank any excuse to renegotiate your funding facilities. Remember that an overdraft should cover short-term timing of cash outflows and is not an ideal for longer term source of funding. Think twice before you succumb to giving any personal security for business funding – what are the alternatives? Sell any surplus assets - cash balances are likely to be more useful than under-utilised non-cash resources.
Customers and marketing
Customers will prefer to use businesses that approach them on a pro-active basis, maintain personal contact, and who obviously want to do business. Also consider what offers can be used to tempt in new and existing customers. Maintain and improve your standing in the local community – now may be a good time for staff with spare time to contribute to community projects.
Are you identifying, assessing, monitoring and mitigating risks to the business? Have you considered the impact of the credit crunch on staff, key suppliers, customers, stock levels, asset valuations and your banking facilities? Have you consulted staff about, and encouraged them to contribute to, the identification of key risks? Do you have systems and controls in place to minimise the risk of fraud?
Is the strategy of the business still sound? Consider where you want the business to be in one to five years time and then how you will get there. Question the way in which you do things and consider what making changes could do for improving the business. Make sure you are speaking to your customers and understand their strategy. What are your competitors doing and are there any opportunities for expansion or growth because of this?
For the full guidance please see ‘Managing through recession towards new opportunities’ and 10 Questions for Accountants and Finance Directors of Private Companies to ask themselves during the Economic Downturn on the ICAS website.
Paul Hally is a partner specialising in restructuring and insolvency law with leading UK law firm Shepherd and Wedderburn LLP