Survive tough times by becoming more efficient
November 6, 2008
By Nick Hough
It's a tough time for many business owners, with firms facing lower demand and pressure on their cash flow. To survive the economic downturn, companies will need to do things much smarter.
Here's a guide to help your company increase its efficiency.
Budget carefully: Prepare an up-to-date budget of how you really expect your business to do in the next six months. Think first about your expected sales and then estimate your costs. Be realistic: there's no point in trying to kid yourself.
Use this budget to prepare weekly cash flow projections for the next three months. Think of each cost and when it needs to be paid. Estimate likewise for each type of income and update your projections every month.
Make sure you will have enough cash resources to match your cash flow projections. Decide if you need new external finance and review the available sources. Seek extra funds well in advance, not at the last minute.
Make everyone in your business cost conscious, especially your top management, and stick to the budget.
Purchase wisely: Defer any major or risky purchases that are not absolutely necessary and buy cheaper alternatives if possible. You need to hold on to as much cash as you can.
Take as much credit as you can from your suppliers. Don't breach contracts, but hold on to your payments until a few days before they are finally due.
Consider alternatives to making an outright purchase. Look instead at hiring or leasing goods and services, which is far less demanding on your cash flow in the short term.
Reduce your debtors: Always keep precise payment records for your customers. At any time you must know who owes you money, the amounts involved, how old the debts are, which are in dispute and what action you have taken so far to try to collect payment.
Establish a firm credit policy and emphasise payment terms to customers. Make sure you have a standard procedure for pursuing debts, with specific actions at given intervals after the payment due date.
Credit-check all new customers and regularly review your credit line for existing customers.
Control stock tightly: Carry out a full review of your inventory system and identify areas where you can improve efficiency and cut costs.
For example, are your record keeping and planning procedures as effective as they could be? Are your storage and delivery facilities properly organised? Do you need to hold such high stocks of raw materials?
Focus your stock control efforts on high-price and high-volume items. If you can control these better, you'll make an impact on your inventory costs. Minimise work in progress and stocks of finished goods.
Focus your marketing: Review the costs and margins of each of your company's products. Drop unprofitable products and limit your selling effort to the most profitable lines.
Avoid extra sales unless they will actually make you money fast, otherwise they will simply strain your working capital further.
Work out who your most valuable customers are - in terms of margin and long-term loyalty. Ensure you maintain close contact with them. Listen to what they say and want, and serve them well.
Use incentives to move slow-moving or ageing products and convert them into cash.
Reduce your overheads: Scrutinise each of your company's fixed overhead costs.
Significant overheads to know about include rent, rates, power, lighting, plant, equipment and staff costs. Ensure you have someone in your business who is responsible for monitoring and controlling each overhead.
Look for every opportunity to reduce operational overheads by simplifying the production process and working methods.
Cut down your staff overheads by organising people better. Eliminate time-consuming meetings and drop burdensome procedures.
This is an edited version of a report by Nick Hough, the national sales and marketing director of The Regent Group, which offers specialised financial solutions to SMMEs
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