Cost-Cutting Is Not The Only Answer

Unless businesses take pre-emptive action at an early stage to manage issues as they emerge, they may well become yet another casualty of the tough environment. Some points that must be taken into account as trading conditions tighten include:

1. Understand customers - Questions businesses should ask, and answer, include:
   
   
   • Are we an essential or optional supply line to customers?
     
     
   • Which of our customers are likely to suffer in a contraction? Will we become vulnerable? Are customers going to cause us problems by being slower to settle accounts, or possibly not pay at all?
     
     
   • Do our customers hold more of our stock than they will be able to move quickly? What impact will this have on our sales and debt collection?
     
     
   • Will we have the resources to allow us to control market share in a downturn without resorting to the dangerous practice of price-cutting?
     
     

2. Manage cash flow - If good procedures and practices are in place, interest rates in tight trading times can be managed, as can the level of debt.
   
   However, businesses need to be mindful of the impact on cash flow when their sales move down, particularly if capital repayments are required from ongoing, but diminishing, cash flows.
   
   Remember, when it rains the bank wants it's umbrella back - and your own customers may not want, or be able, to pay on time. The creditors' ledger is a key source of cash for a business. Always watch both ends of the cash flow situation - availability of funds and allocation of disbursements.
   
   

3. Avoid waste - Waste costs a business, and is a drain on resources - particularly cash.  Buying goods and services that are not helping the business survive and prosper is foolhardy for any business, but especially during tight trading times.
   
   

4. Keep the best people - If the business contracts, it may be that there will be redundancies, but every effort should be made to retain the good people. They will help carry you through the difficult times.
   
   In good times the quick fix is often to put more people on to solve problems or to take advantage of opportunities that are no longer relevant.
   
   It therefore follows that, at the start of a downturn there may be an opportunity for some careful belt-tightening that will not affect business operations. If so, and according to how employment agreements were structured, businesses should be prepared for redundancy costs.
   
   

5. Examine all costs - All fixed costs must be reviewed. Can the business change suppliers to reduce costs and is this a good idea? If there are long -term contracts, these can be difficult to shed. What about simple measures like putting off replacement programs for a year? Ask staff to get involved in cost-cutting measures - often they are more aware of unnecessary expenditure than the owners.
   
   

6. Supplier stability - Reliable suppliers are a key factor in continuing to service clients. Who are the suppliers that may not survive a difficult market? Will suppliers be able to honour contracts, warranties or recalls? Is the business handcuffed to one supply line or are there alternatives? Even if supplies can be sourced elsewhere, is it a good idea?
   
   

7. Inventory levels - Tough economic times will affect spending and product lines. Businesses should review their inventory control measures.
   
   Can inventories be cut? What lines are most likely to suffer in poor trading conditions? Is the business currently carrying larger than prudent inventories? What will become obsolete and require write-downs?
   
   

8. Competitor pressure - The actions of competitors are likely to be a major consideration. Which competitors may be forced into a dumping strategy to stave off financial problems? How can this be combated? Are you positioned to step into a competitor void if one arises? Will there be acquisition opportunities and are such considerations sensible in difficult trading times?
   
   

9. Business plan - Finally, how robust is the business plan? Does it take into account the probable difficult trading times businesses are now facing? Should it be re-examined? If so, should expert advice be sought?
   
   

The sooner external help is brought in, the more effective it is likely to be. If it is left too late, the external expert brought in could well be a liquidator or receiver. 

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