Surviving everyday volatility

by BN26 Jan 2012

Volatility has become more obvious this year due to global economic factors, but you can buttress your business against the ebb and flow with these 5 tips from Sue Hirst.

 Most successful business people I’ve spoken with believe 2012 will be tough for some business sectors. We’ve heard about the two speed economy– meaning mining-related businesses and the rest. Whatever sector you’re in, it pays to recognize and mitigate risks and capitalise on opportunities.

A recent NAB Quarterly Business Survey stated “Business confidence deteriorated across all industries in the September quarter, with the largest deterioration in finance/business/property – likely reflecting recent volatility in equity markets – followed by manufacturing – probably reflecting continued strain caused by the relatively high AUD.  Confidence was strongest (and positive) in mining, followed by construction, where it was neither expanding nor contracting.  Particularly weak confidence was recorded in finance and manufacturing.”

Here are some tips for thriving in 2012:

  1. Constant business model improvement

It’s the way you operate, or how you deliver your product or service and how you fund business. Your business model can be a ‘fluid phenomenon’, something that is constantly tweaked to achieve maximum efficiency and performance.  It’s worthwhile engaging the help of an advisor who understands business models.  Having the right model can make business life smooth whereas having the wrong model can result in constant struggle.

Few business owners pay enough heed to their business model.  We often hear “that’s the way it has always been done or that’s the way we do it and it works.” This may be so, but could you do it better? Could you fine tune, add, delete or maximise the higher profit producing areas and reduce the low profit ones? Could you find easier ways of distribution or delivery? What about staff, could some contribute better in other ways?

  1. SWOT Analysis

Have a look at your strengths and how they help you compete in the marketplace and ask how you can build on them. Look at your weaknesses and consider what they’re costing and how you can improve them. Opportunities can be found in places you may not think of. For example, in our business, ‘cloud commerce’ has shattered geographical barriers, so we’ve begun offering services to geographical areas previously impossible. Threats can be environmental and beyond your control, however, if you consider them and put in place appropriate risk management, you may be ahead of the competition when the proverbial hits the fan.

  1. Constant improvement

We can all find constant improvements that, when added together, make a huge difference to business efficiency and results. The key to constant improvement is listening to staff, customers, suppliers, shareholders and advisors. The best way to capitalise on constant improvements is to have good systems in place that enable absorption of improvements. That way when you come to sell your business you’ve built a solid asset that can be handed over to a buyer and odds are you’ll get a premium price. A systemized business is easier to sell to a new owner.

  1. Cost management

Direct costs are those that are absolutely necessary to deliver a product or service, such as service labour or purchase of product, and are the biggest target for improvement. Research your industry and technology to find better ways of operating. A small improvement in direct costs can have a huge impact on your bottom line. Don’t cut ‘muscle’ in business such as effective marketing or good staff, but look for ‘fat’ or resources that aren’t delivering value.

  1. Cash-flow management

 

Current Assets

Accounts Receivable                                      $100,000

Inventory/ Work in Progress                           $150,000

Total Current Assets                                       $250,000

 

Current Liabilities

Accounts Payable                                           $50,000

Overdraft                                                        $50,000

Short term loan payments (12 months)           $40,000

Total Current Liabilities                                  $140,000

 

Ratio Calculation:

$250,000/$140,000 = 1.79

 By 2012, some businesses have had a rough couple of years and getting to the end of their resources. They may have had to use cash reserves, borrow or reduce overheads. If you’ve experienced cash flow squeeze for the past couple of years and can’t see light at the end of the tunnel, it may be a good time to consult an expert in finance or insolvency. Consulting an insolvency expert can make a huge difference to your personal outcome of business liquidation. They can help you navigate the rules, so you don’t end up paying an unnecessarily high personal price. They can facilitate negotiations with suppliers, ATO and banks. If your business is impacted negatively by a particular sector of the market you need to keep a close eye on cash flow. A good indicator of cash flow is calculating liquidity. A good measure of liquidity is ‘Current Ratio’. This is the result of dividing current assets by current liabilities. It shows the number of times current liabilities are covered by current assets. Banks look closely at this ratio when lending, as they want confidence about loan repayments. Business owners need to know this for their own peace of mind. Below is an example of current ratio calculation. In this example, for every dollar of current liabilities there are $1.79 of current assets to cover it. Keep a close eye on this ratio, to identify the trend and work at improving the factors affecting it.

 Sue Hirst is the director and founder of CFO On-Call Advisers, who offer services that help businesses achieve growth and success.