Remodelling your business finances to survive the downturn

Staring down the barrel of an almost inevitable recession following a period of economic prosperity, many business owners are wrestling with an uneasy feeling that their businesses are not prepared to weather the challenges ahead. So how can you improve your cash flow situation and secure the financial support you need in order for your business to survive?

With economic confidence high in previous years, securing financial support has been relatively easy for businesses, leading many to get by with inappropriate or inadequate financial reporting standards. However, with asset values on the way down, and lenders’ belts tightening across the country, companies are finding it increasingly difficult to attract the necessary funding to stay afloat and maintain business as usual.

Accountancy firm Lawler Partners has witnessed this first hand, with an increase in businesses approaching them for financial restructuring, reporting and performance advice during this tough time.

Watch which way the cash flows
Cash is the lifeblood of a business. Having a healthy cashflow is critical to ensuring businesses aren’t caught out-of-pocket and can cover unexpected costs. The number of businesses that don’t have regular, reliable financial information on their cashflow is frightening.

Successful businesses are ones that can keep on top of the cash flowing in and the cash flowing out. It’s about knowing where money is, staying on top of finances and having the right systems in place to support the growth of a profitable business.

It is important to realise that while cash and profit are interrelated, they are not the same thing. Businesses need to ensure the cashflow from normal trading activities, as opposed to financing or investment activities, is positive, and if it isn’t, action must be taken immediately.

There are a couple of simple tools that can be used to evaluate a business’ cashflow position:

• Establish a cash forecast for the coming year. At a minimum this should show the monthly closing cash balance, so that appropriate planning can be undertaken for the leaner periods. Understanding the business’ own cashflow cycle on a line-by-line basis is the valuable result of doing a forecast.
• Monitor the business’ main ‘cash competitors’ closely. These are normally stock and debtors, which can often be the real drains on company cash.  Develop specific strategies to reduce the number of days debtors are outstanding and the number of days stock is on hand.

If it matters, report it
Businesses large and small are intensely aware that contracting market conditions mean a company without proper financial reporting systems is not going to survive for long. To ensure that back office systems provide relevant information, it is imperative that accurate and up-to-date reports are kept, so managers can stay on top of any changes in businesses operations. These reports should show both financial and non-financial ‘success’ indicators, with the latter usually being better forward planning signs. Consult an accountant about these reports, as they form the basis for making good decisions.

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