WEATHERING ECONOMIC STORMS

It’s hardly news … in the past couple of years New Zealanders have been coping with some stormy economic weather care of high inflation.  Households have tightened their belts in a bid to cope with high interest rates.  Businesses have reported lower sales, putting capital projects on hold and limiting hiring.

The tide is turning, though.  Inflation is being tamed.  As a result, the Reserve Bank has reduced the Official Cash Rate (OCR), which will result in interest rates and consequently, loan repayments decreasing.  This will be welcome news for borrowers.  It may be some time however for businesses to experience these beneficial effects.  In the interim, here are some factors business owners can address to help them cope with difficult times.

1. Arms Outstretched

Commonly, when business isn’t trading well, owners work harder and longer in an attempt to right the ship.  Whilst this is laudable, often it’s futile.  Then when things go from bad to worse, ostrich behavior is frequently practiced.  This isn’t conducive either to turning business around.

Ask any professional advisor and they will tell you of clients they could have helped, had they been contacted early on in the piece.  There is often a window of time where advice can benefit a business.  Go past that point instead of assisting a business to continue, advice has to be tailored to closing the business with the minimum amount of fall out. Herein lies the lesson.   Get real quick. Embrace reality and reach out to your accountants who are trained to provide business owners with solid advice. 

2. Manage Cash Flow

It’s not called cash flow for nothing.  Businesses can be profitable on the books but if the cash isn’t flowing, a business can end up closing. With that in mind, there are some key areas to focus on.  Keep reading for tips that will help the flow of funds.

3. Terms of Trade

Whilst no business should continually change their terms of trade, all businesses should regularly review them to ensure those terms remain suitable.  In particular, owners should look at how many days they give their debtors to pay their invoices.  Sometimes, requiring payment on the 20th of the following month is not the best for a business.  What worked previously, may not work any longer.  If change is needed, step up to the plate, give your customers notice of the change in trading and implement the change. 

4. Management of Debtors

This flows on from the above point.  There’s little point in invoices having a due date if businesses aren’t prepared to review their debtors and impose penalties for non-payment where appropriate.  Have a look in the business to determine who is managing your debtors and how successful they are in this pursuit.  If the person responsible for debtor control is frightened to pick up the phone and talk to customers who owe you money, they may not be the best person for the job.  Ultimately their ability to be effective can cost the owner their business.

5. Payment of Creditors

To state the obvious, part of managing the flow of cash is getting money into a business before it has to be paid out.  Hence, owners should be reviewing the terms they’ve signed with their creditors and if necessary, renegotiate those terms providing the business which much needed time to receive and then pay out cash.

6. Satisfying Tax Liabilities

When cash is tight, it’s tempting to avoid paying tax as it falls due. For example, GST returns don’t get filed as owners know it will crystalize a debt owing to IRD.  The IRD however is both powerful and amenable.  Ignoring the Commissioner is not an option.  Eventually, they catch up with the business and the owner, demanding what is due.  It is far better to file the GST return and enter into an arrangement with the IRD via your accountant.  IRD would much prefer to collect taxes due than liquidate companies and bankrupt individuals. Proactivity is key.

7. Short Term Decision Making

Whilst all business costs should be examined, knee jerk reactions to cut costs that affect key parts of a business should be carefully reviewed.  Owners should avoid making decisions that help a business in the short term only to find it hinders the company from bouncing back when economic weather improves.  Some cost-cutting measures can result in time-consuming and expensive recovery measures in the long term.

8. Touching Base With Existing Customers

When was the last time you contacted your existing customers?  Current customers ae frequently a goldmine of untapped business.  Making a phone call might enable you to provide better quality service.  It may even result in extra business walking down the phone line and into your company.

SUMMARY

Businesses come in different shapes and sizes.  Often they’re subject to unique problems and challenges.  That said, the above factors should help businesses navigate stormy waters and emerge stronger when economic weather improves.