Foundations & Strategies
Economies are dynamic. They expand and contract. Sometimes they explode in bursts. Sometimes they’re stagnant. They’re influenced by global and local events, like pandemics, wars and discoveries. Economists look for patterns and try to predict what’s next. Governments and central banks implement policies to maintain stability. Economies still manage to go off the rails!
There’s a lot of talk at the moment about Australia being poised to enter recession, the definition of which is two successive quarters of downturn in gross domestic profit.
Our aggregated data for Counting Clouds clients shows that this is not the case in our creative community. Xbert software, which we use to provide deep insights into our clients’ transactions, shows 3.3% growth in gross profit from Oct-Dec 2023 to Jan-Mar 2024, and 3.3% again into Apr-Jun 2024.
Nevertheless, the data for Jul-Sep 2024 (not quite complete at the time of posting) shows that this quarter has not performed as well. In recent chats with our clients, we’ve also been hearing concerns about the economic climate. Gross profits have been offset by rising costs of utilities, supplies and wages.
To provide some sense of security, we’ve drawn up this guide to surviving a financial crisis. You can call on it if your business is facing temporary difficulty or as an emergency plan for the randomness that life might throw at you. You can also use it to tighten your operations, whatever the economic climate.
Understanding your financial position is like knowing what's in your refrigerator and pantry before you start cooking a meal. You don't just start chopping cauliflower and hope your dinner will work itself out as you go. First, you have to take stock of your ingredients and the quantities at hand. Then, you make a plan or use a recipe. You make adjustments and substitutes as needed and maybe even run to the shops.
Apply this to understanding your finances: What do you have? How much do you have? What's your plan? What adjustments do you need to make?
This guide is designed to be a process of looking at your bookkeeping, government compliance, net worth, cash flow, stock, income, expenses, debts, personnel, marketing, funding, loans and credit. After doing so, it suggests the best mindset for taking action!
Bookkeeping & Compliance
First of all, in a crisis it’s more important than ever to not bury your head in the sand. Get your bookkeeping reconciliations up to date so you can make informed decisions.
You also need to be vigilant to not let government compliance obligations slide. We recommend you put 10% of your income aside for GST each time you get paid, meet your lodgement deadlines, pay your workers’ compensation insurance premiums and pay superannuation - The last thing you need is to lose money in penalties or to be falling foul of wage theft laws.
Make maintaining these foundations a priority so that you have peace of mind, at least when it comes to admin and compliance. Keep your house in order so that your head is clear to focus on what you need to do next.
Net Worth
Next, it’s time to take stock by knowing your net worth. Even if you don't have cash in the bank, you might have a lot of sellable stock on hand or other valuable assets. Conversely, you might have a lot of cash in the bank but owe a lot of money on credit cards, loans or ATO debts.
Just looking at your bank account balance or even your profit and loss reports won't tell you the whole story. Knowing your net worth paints a real picture of your current financial position. Here's a nifty Moneysmart calculator to get you in the know!
Cash Flow Forecasting
Next, you can drill down further, preparing a 3 or 6-month cash flow forecast, broken down into weekly cash flows. If you don’t know how to do this, ask us!
For a cash flow forecast, you’ll need to identify:
- Your monthly costs
- Which costs are essential and which you can cut
- How much you owe and when repayments are due
- How much you can expect in income each month
- How much you have in reserves to bridge gaps between income and expenses
Now ask the question: If there’s a 20-30% drop in revenue, what will be the impact on your cash flow? Work through the following strategies to navigate those circumstances.
Stock
Holding a lot of stock is a risk. It may become obsolete or unfashionable and then never be sold. It can also be costly to store. If you're holding stock that can be sold, it’s best to sell it to turn it into liquid cash. Then you can invest in new stock.
Income
Encouraging as much inflow of income as possible will help secure your cash flow. Sometimes, debtors need options or incentives, especially when we’re all in the same economic boat. Here are some ideas:
- Offer discounts for early or on-time payments
- Offer payment plans - A trickle of income might be better than nothing
- Seek upfront payments where possible
- Make sure your terms and conditions are structured adequately to protect your right to recover debts
- Sell surplus assets that do not have debt attached to them
Expenses & Debts
As with the above, your suppliers and providers will be happy to receive your payments and might be willing to provide options or incentives to help you pay. If you’re proactive in communicating with them, it will show good faith that you’re doing your best to honour your debts. Try the following:
- Contact key suppliers to negotiate extended payment terms
- Investigate payment plans offered by government organisations and utilities providers
- Clear smaller debts as this will reduce the number of suppliers with whom you need to negotiate
- Discuss reducing or deferring rent with landlords
- Discuss converting bank debt to interest only or arranging a repayment holiday
Personnel
For many businesses, staff can be their biggest expense but also their biggest non-financial asset. You’ve probably invested a lot of training, product knowledge and skill in your staff members. Before making redundancies or downsizing:
- Look at your own wage and adjust it if you can
- Review your rostering for time efficiency
- Allow voluntarily reduced hours if appropriate
- Speak to staff about moving to part time employment in the short term
- Consider short term salary cuts for higher salaried employees
Reduce employee turnover by talking to your employees and listening to them. Employees tend to stay if they're feeling fulfilled, challenged, appreciated, rewarded or respected. They tend to leave if they’re feeling uncertain of their job security or taken for granted. That's not to say that happy employees don't leave, but if you treat your staff well, there's a better chance they’ll stay. This results in less cost from turnover of staff.
Reduce absenteeism by working with your employees to ensure they have the right working conditions to avoid being affected by stress or having a tendency to take ‘sickies'.
Prioritise upskilling your team. This enables them to invest THEMSELVES in the business. Most people want to grow and learn, to get better at their jobs or attain promotion for higher pay and expanded opportunities.
Marketing
Consider how your product mix and sales strategy may need to change. For example, do you need to introduce lower-cost products and services to provide more affordable options if everyone is struggling with the cost of living? Some ‘little treat’ options could help to keep sales coming in.
Revisit your marketing plan for ways to promote your business in a low-cost way so that you can compete to win scarcer sales opportunities. It's important to keep promoting your brand and telling your story. The attention economy is real and you have to keep reminding your audience that you're still here.
Consider reducing your operating hours to reduce running costs relating to utilities and staff. (More on personnel below.)
Funding
In times of crisis, governments often provide funding assistance to keep businesses going so that the economy doesn’t come to a complete halt. Search for support options provided by industry groups and federal, state and local governments.
Loans & Credit
When taking ANY loan or credit option, it’s important to manage the debt well and to pay it off on time. If you’re already overwhelmed and stressed with debts to suppliers or the ATO, this may be exacerbated by taking on more debt to pay that down. We recommend discussing this option with a financial advisor before taking the plunge, to make sure it doesn't just dig you a deeper hole.
Hurry Calmly
Before you take action on the above, take a breath. Assess if there’s anything that requires you to act immediately.
You should act swiftly to not be complacent, but not so hurriedly as to be prematurely reactive.
Realise that you can be both calm and effective. Being relaxed and moving quickly are not mutually exclusive. It's actually much easier to move when you’re not holding yourself in a state of tension.
Remember that YOU as a person need to survive the crisis too. What good will your dream business be if you’re an exhausted, nervous wreck? Check your stress levels and help yourself with healthy stress relief methods.
See your circumstances as an opportunity to practice skills in endurance and adaptability. Don't fixate on what you're losing, but instead appreciate what you're retaining. Learn through this experience, and set some bolstering goals to safeguard you in the future.
Please remember, we're here to help. Let us know if you'd like a cash flow forecast, a chat or an extended consultation session. Don't look away or let worries consume your energy. Gathering knowledge is the first step in navigating your business to a better position, so feel free to email us on help@countingclouds.com.au
