Our tips to you during this period
(Updated 18 March 2020)
It is difficult to fathom the speed of events lately, and the magnitude of the changes we have had to adapt to in a very short time. It may actually be wrong to say that we have had to adapt. Rather, most of us are in the middle of a change process that we were not prepared for and certainly did not want.
Many things will appear insignificant compared to the bigger picture and following the health authorities’ advice and looking after all those around you is paramount. There is a need for community during this period that we are entering. I will leave the circumstances to one side for now, because it is time for practical action.
As a manager or company owner you probably have more questions than answers right now. Before delving into the details, I’d like to remind you that there will be a time after this crisis. There will be a time when the weekdays return to normal. The way you treat your staff, and how you communicate with customers and suppliers, will be remembered.
We at VIEW are working to give our clients superpowers within financial management, and our target has been to give our customers insight and oversight in real time. This gives organisations increased control and a better basis for decision-making. Even though we are happy to take on full responsibility for the tasks at hand, we strongly prefer that our customers are involved in their finances.
…unless you have to. This is when you need to show the market your presence by being close to your customers. Do you have clients you haven’t spoken to for a while? Get in touch and dedicate a bit of time to talking to them.
Your staff will also experience uncertainty and may have become a bit less productive due to working from home. Make sure you meet digitally on a daily basis, so that you stay involved with how they are and what they are working on.
In a recession it is especially important that your business finds the right balance between short- and long-term debt. Short-term debt, with little or no security, is normally more expensive than long-term debt secured on property or other fixed assets. If a company has too much short-term debt it should consider converting some of it to long-term by providing better collateral. If the valuation of a company’s fixed assets is not up-to-date and does not reflect their true market value, it may be beneficial to seek a new valuation which may lead to better terms from your loan provider.
If your cash flow is strained and extensions on loan payments may be needed, staying in close touch with your bank is an excellent idea. If your company owes money to its shareholders, you might want to consider whether this debt can be converted to equity in order to strengthen it.
When cash flow is good, many companies have limited focus on the composition of their inventory, letting it grow too large with time. Such surplus capacity is costly for these companies, binding capital and reducing cash flow.
During lean times it is important to reduce the part of inventory that has a low turnover. For many, reducing the price of such goods in order to get them sold is a good solution, freeing up capital and improving cash flow, rather than hoping for a better price at some point in the future.
Another short-term solution is to examine supplier contracts and relationships to explore the possibility of returning surplus goods. The supplier could also keep the inventory and fulfil customer orders directly. Regardless, the business should, possibly together with its accountant, evaluate its processes pertaining to ordering, receipt, storage, issue and transport, thereby laying a strategy for streamlining their inventory over time.
Reducing running costs
During lean times, an increased focus on sales and marketing may be necessary to avoid a fall in turnover. However, for many companies it will be at least as important to reduce costs. Therefore, a number of organisations will be focusing on having the correct staffing levels, considering both permanent and temporary layoffs, combined with measures to improve operating efficiency. Additionally, every organisation has a lot of smaller purchases and expenses which can add up to large sums. A regular assessment of the company’s cost structure may therefore be an important contribution to increased profitability and improved cash flow.
Investments and sale of fixed assets
For some companies it may be right to take risk and make investments, even in lean times, thereby positioning themselves well for when the market turns. Through a recession it is especially important to diligently ensure that all investments are based on sound financial analyses. Non-essential investments should be deferred.
A good benchmark is to delay investments that don’t provide immediate return, as these will otherwise bind up the company’s capital and limit its financial freedom. For the same reason it may be profitable to sell fixed assets not contributing to turnover. In addition to improving cash flow, it may also reduce direct expenses such as interest, insurance, maintenance, fuel and so on. Renting rather than owning is also worth considering in order to free up capital.
Customer and supplier relationships
To ensure a healthy cash flow the company should consider applying for the best possible payment terms from both creditors and suppliers. At the same time the company should optimise its customer receivables by establishing good processes for invoicing, credit and collection.
At the present time customers’ credit worthiness may be reduced compared to earlier assessments. Bankruptcies and losses that were unlikely only a short time ago, may no longer be avoidable.
All new customers must be credit checked, and existing ones should be re-evaluated regularly. Checking for any negative marks on the customer’s credit report should be an absolute minimum.
Invoicing ought to be carried out as quickly as possible, preferably at the same time as delivery. Statistically it becomes harder to collect receivables as the time between delivery and invoicing increases.
Payment up front should also be considered, especially for customers with bad credit ratings. Many businesses can reduce the credit time on existing invoices. If a business is selling goods and services over the internet, it should establish solutions for online payments. This both improves cash flow and reduces risk.
Ensure that collection processes are optimised. Keep a keen eye on the development of collections and evaluate each individual customer. Late payments ought to carry a price. Update contracts with clauses regarding interest and fees in the case of late payments.
Consider ringing late payers, and do not accept new orders from customers who don’t pay you. If there is a strain on cash flow, factoring may be a solution, but keep in mind that this carries a cost. In addition, you may have a modern ERP system, allowing you to sell invoices directly from it. Use this option if you are short on liquid means.
Do please contact us for a conversation about what our systems are particularly well suited for.
It may be smart to apply for reduced advance tax payments. In our experience it is possible to have paid advance tax refunded.
Finally, in case you missed it at the beginning of this article:
The way you treat your staff, and how you communicate with customers and suppliers, will be remembered.