Planning for the new financial year

Reduce own debt

Lower interest rates and increased competition amongst lenders has made it fairly easy for businesses to take on debt in recent years at no great pain to themselves.

However when things toughen up – for instance in a recession – those friendly lenders are often the first people to appoint receivers. We are already seeing banks being hit by defaults and they will get more and more stringent in their efforts to reduce these numbers.

The cost of capital is often viewed as an essential cost of doing business.  But the less you borrow, the smaller the ultimate cost.

If a business’ debt is expanding in a way that is not creating income, it should be seen as a warning sign. In other words, if the debt is not funding new sales and expanded market share, it may be that it is simply funding costly and wasteful habits within the business; for example, excess inventory or the debtors’ ledger as described above.

In the present operating circumstances it is a good idea for business owners to aim to reduce debt levels. Increased debt should be a last resort after looking at all other remedies and making sure that the debt is productive.

Measure success

During more difficult conditions, business owners must make a greater in order to effort to assess and measure business success. When times are good, this tends to slide, but now is the time to refocus attention and make sure the business is performing the way it should.  Business owners often find that their perception of how the business is performing, and the reality, are very different.

There are many areas to look at, such as sales, costs, or revenue growth. Remember that customers drive revenue growth and you need to measure such things as customer intimacy, operational excellence and, in large businesses, product leadership. Measuring sales is often too late. Business should focus on lead, rather than lag, indicators.

Understand the customer

As times get tough, many customers start to tighten their purse strings. Understanding the customer base and their purchasing habits will become increasingly important.

It is a good idea for business owners to look at where they fit in their customers’ own operations. For example, businesses that are an essential supply line probably have less to worry about, but those that are one option amongst many may find themselves doing it tough.

Also consider how customers are likely to suffer in a downturn or a recession. Are they going to cause problems by being slow to settle accounts (or possibly not pay at all)? Many good businesses end up suffering and even failing because they rely on one big customer that doesn’t pay on time.

Review suppliers

On the other side of the coin, review suppliers – they are a key factor in a business’ ability to service customers. Business owners should ensure suppliers are likely to survive a difficult market, and continue to honour warranties and recalls. Also make sure there are alternatives so that if the worst does happen, it doesn’t affect your own customers.

Dennis Mattiske is a partner with accountants and business and financial advisers HLB Mann Judd Sydney.