Planning for the new financial year

The start of a new financial year is always a good time to look at plans and activities that will help the business over the next 12 months. This year, planning will be even more important as businesses deal with a challenging economic environment, high interest rates, and low consumer confidence.

Commentators and economists have varying views on what the next year holds – whether interest rates will continue to go up or start heading down; and whether the Australian economy will enter a recession or recover from the recent downturn. 

Even those who say that the Australian economy is better placed than most to survive a global recession also admit that Australia cannot expect to escape unscathed.

In these circumstances, it is a good idea to take a good hard look at the overall business position. Preparation now will help businesses ride out any difficulties. For SMEs in particular, it makes sense to review the approach for the next few years, with a view to ensuring that there are plans in place for any eventuality.

This review should cover five or six main areas where efficiencies can most easily be gained, such as waste and expense control; expansion plans; inventory; debtors; and overall debt.

Waste and expense

Many businesses waste time and money on activities that don’t add much to the business’ success or growth. When times are good, such waste is possible to overlook, but during more difficult times, any inefficiencies must be ironed out.

While businesses shouldn’t curtail essential activities in a way that damages business growth, a prudent approach in uncertain times could be called for. 

Look at operating expenses generally to see if there are cost areas that can be reduced. A good starting point is to review the expense side of the business accounts for the last few years and to see what areas have increased most and to analyse these to see where savings can be made.

For example, staff costs can rise quickly in good times and therefore should be reviewed now, particular in areas of the business that might experience a slow-down. However, keep in mind that good staff can be hard to find and expensive to train, so any redundancies require a good deal of thought.

Inventory

Inventory is one area of cost that is often overlooked. Inventory needs to be funded, and reducing inventory levels can be a great help in reducing borrowings.

Businesses should look at individual inventory lines, particularly the high value ones, to make sure that the levels being held have not increased. If it has, this may indicate lack of demand for certain products and, if this is the case, ways of reducing holdings such as special offers on such lines should be considered.

Consolidate first

All expansion plans need serious review in the present circumstances. This is not to say they should all be shelved, but plans that require taking on major debt or other operating costs, such as increasing rental on new premises, should be reassessed.  This may not be the best time to add costs to the operations, particularly if there is a chance of doing a better deal in a few months time?

A good attitude for tough times is to be income-led. This means that any change or initiative introduced must directly create income for the business. By operating in this way, business owners make sure that any additional costs created in the current environment will consolidate or create income rather than invest in long-term opportunities or areas where success may be uncertain and new income difficult to achieve.

Manage debtors

A common feature of many businesses that do not survive a recession is that they have not paid attention to their debtors. This is particularly true of businesses with one or two customers that, if they were to default, would cause the business to suffer serious losses and potentially collapse. Business owners should continually monitor the debtor situation, making sure that 30-day accounts do not blow out. This will do more than anything else to help a company look after its liquidity and, ultimately, survive.

Owners who look after the debtor side of the business in a disciplined way are in fact strengthening their business.