If sales decline, it can be challenging to cover wages and overheads. Putting your head in the sand will likely spell disaster for your business and your family. Planning with realistic budgets help you identify problems before they occur.
First, be sure that you understand your staff expenses, including wages, superannuation and leave entitlement. Next, have a clear and accurate list of overheads like rent, subscriptions, and insurance. Also, understand your cost of goods sold percentage.
Prepare two budgets—one based on a realistic worst-case and one on a practical best case.
You may need to adjust your overhead to generate a small profit, even in the worst-case. If the best case eventuates, you get to bank a profit. Of course, direct costs like production labour are more challenging to manage and often involve specific skills that you want to keep. In some cases, it might be well worth increasing your percentage cost of sales to maintain these skills. Also, remember to plan for increased capacity. Essentially, plan your direct costs based on a realise best case and your overheads on a realistic worst case.
Cash flow is also essential. The following activities will assist greatly:
Invoice quickly – Always send invoices immediately after you complete the work. For large jobs or work that involves significant outlays, make sure that your terms allow for a customer deposit before commencing work.
Terms & Conditions – Be sure that your payment terms are clear and agreed upon by requiring your customer to submit an order and acknowledge your terms & conditions.
Credit Check – If you invoice any part of your work after the completion, run a credit check on the business before starting work. Also, require personal guarantees from customer-owners and directors.
Accounts receivable – Have a strict procedure assigned to a staff member to ensure that reminders are sent. Set a policy for collections 1st reminder might say ‘Friendly Reminder’. The 2nd reminder might say ‘Urgent Reminder’, and the 3rd reminder would say, ‘Pay now to avoid referral to a collection agent’. If you still don’t get paid, do refer the matter to a collection agent promptly. Someone who won’t pay your invoice on time is not a good customer.
Talk to suppliers – But be careful. I see much advice suggesting that you should be honest. Whilst that be honourable, it can get you into a lot of hot water. Admitting that you cannot pay a bill is an act of bankruptcy under insolvency law and has significant consequences for you and the people that rely on you. Talk to your supplier long before you are in that position. Secure the best deal possible.
Analysis Stock – Look for alternative suppliers. Also, look for upselling options that might assist your customers and benefit you. Always look for a win-win, never capitalise on your customers at their expense.
Examine your costs – Look for waste, particularly in subscriptions and office supplies. Review your lease and negotiate a better deal when the lease is due to renew or consider moving premises.
Automation: Can some tasks be automated? Robots are becoming more efficient, and outsourcing some production components might be less expensive than in house production but be careful that quality is maintained. Many office tasks can also be automated.
We can help you review the strategies to protect your business long-term and help you alleviate cash flow worries.
The information in this article is general in nature and might not be right for your circumstances. Please arrange a meeting with one of our Accountants to discuss your particular needs.
