Batten down the hatches
Are we heading for another recession? Take steps now to protect your current assets and secure your cash flow.
The recent events in Europe and the seeming inability of European politicians to sort out the continent’s economic woes are undoubtedly going to have an effect on us down in the Antipodes. The big question is whether the ripples will be strong enough to cause a double dip recession here.
While we are, technically, out of recession there is still a feeling of economic pessimism in certain quarters and it must be admitted that the recovery has not been as rapid as may have been hoped.
The euphoria of the All Blacks winning the rugby world cup and the positive effects of the tournament notwithstanding, the economy is still fragile as are peoples’ psyches about it.
As we approach the end of the year with uncertainty as to what 2012 will hold and on the premise of expecting the worst but hoping for the best, it may be timely for businesses to review how they do things and prepare to batten down the hatches in case of a continued gloomy economic outlook.
Many businesses survived the tough times of the past few years simply by getting the basics right and while nothing contained in this piece is earth-shatteringly revealing it might pay to go back and revisit the fundamental drivers of your business.
Review your statement of performance and identify areas where expenses can be reduced. Every dollar of unnecessary expenditure removed is a dollar that goes to the bottom line.
That thorny matter of the Personal Property Securities Act once again raises its head. We have had this piece of legislation for nearly ten years now and it is still surprising how few business people are aware of how it can protect them and how even fewer actually avail themselves of the law’s protective mechanisms.
It is not a panacea for all ills and a detailed analysis of it goes beyond the scope of this piece, but in times when debtors are likely to default, it is better to have some form of security over your exposure than to be unsecured. If you have not already taken steps in this regard, you should be talking to an advisor now.
Now is as good a time as any to ensure that terms and conditions of trade are refreshed and compliant with contemporary statutory provisions.
Next, that age-old adage still holds true – cash is king. Management of working capital is always important for any healthy business but even more so in times of economic austerity. It is not unknown for a profitable business to go into liquidation, simply because their working capital and cash flow management has been poor.
Now is the time to review that receivables ledger and start taking a tougher stand against slow-payers who linger in the 90 to 120 day category. Review inventory holdings and start moving excess stock. The holding costs of such stock can be crippling and will use up that lifeblood of any business – cash.
On the subject of receivables, businesses should review their credit policies and put in place sound credit control processes. Each new application for credit should be carefully vetted with appropriate references checked and credit agency reports obtained. Another good idea is to seek personal guarantees from new customers who have no proven track record with you.
It would also be prudent to prepare a robust 12-week rolling cash flow forecast based on realistic assumptions, highlighting all cash in and out flows and ensuring that the cash coming in always exceeds the cash going out. Otherwise you need a contingency plan to cover the shortfall. Do not make the common mistake made by many failed businesses, namely, using the IRD as a bank. The tax you collect by way of GST and PAYE must be paid over in compliance with the law and a failure to do so will incur heavy penalties and interest and is likely to lead to recovery action by the IRD.
This leads to the next point; now is the time to assess forward fixed and working capital requirements and to plan on how those will be met. Without being unkind to banks, they do have a tendency to give out umbrellas when it is not raining rather than when it’s pouring down. Any bank will review their loans more critically when times are tough so now is the time to ensure that you will be able to comply with your banking covenants in a tight market, or to renegotiate those terms well in advance.
When times are good people tend to work in their businesses but now, in the face of a bumpy landing, you would be well advised to work on your business.
All this said, in times of adversity it may well be wise to start expanding; there is an ancient Chinese proverb which says “in hurricanes, build windmills”. Be prudent but do not stagnate.
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