This series addresses various recession proofing strategies that can be implemented by your Chief Financial Officer or part-time CFO including:
· Cash and Strategic Funding
Implementing strategies around these elements shield your business during tough times and prepare you to take advantage of opportunities as they arise. Importantly, recession proof companies are prepared before the economic slowdown occurs – they do not wait until it is too late. All businesses are different, it is important to implement strategies best suited to your business. Your CFO or part-time CFO should lead identifying and implementing the strategies most suited to your business. Now is the time to act.
Economic Indicator. The US–China Trade War is currently aiding the Australian economy as China stimulates domestic infrastructure to offset the reduced international investment (Trump orders US companies to 'start looking for alternatives' to China). China’s stimulus pushes up the price of Australian exported resources with governments through royalties and taxes and investors through dividends reaping the benefits.
The risk of recessions is from the continuing or deepening of delayed or discontinued investment in China. A slowdown in China’s economy would result in reduced Australian exports to China. Tourism and Education in particular. With three fifths of the Australian economy now consumption based, this would quickly flow through to reduced Australian domestic growth.
Cash and Strategic Funding.
8 out of 10 businesses fail due to poor cash flows. As a downturn starts to bite, customers are slower in paying, cash reserves dissipate, you start to delay payments to suppliers in order to prioritise salaries. You have implemented many of the Focus on Profit Now strategies discussed in Part 1. In this part we look at the cash flow strategies available to businesses. If you wait until you need the cash it is probably too late to arrange cash flow funding.
Strategies that need to be reviewed to improve cash flows with a view to being implemented by your CFO include:
· Cash Flow Forecasting. Simple cash modelling that look at available cash and accounts payable and receivable summaries are insufficient. A 3-way forecasting model that considers the Profit and Loss forecast and the Balance Sheet creating a robust cash flow forecast needs to be used to keep senior executives forward focussed on the short-term and medium-term cash requirements of the business.
· Concentration Risks. Your CFO should periodically review your business for the risks that could impact it. While customer concentration risk must be considered due to the impact a single or a few customers could make if they substantially delay a payment, supplier concentration risk also needs to be considered. If one of your suppliers becomes distressed or worse goes into administration there could be substantial delays to your business that could have flow on effects to you and your customers. A part-time CFO should determine and implement mitigation strategies to minimise these risks.
· Policies around payables and receivables. Your CFO should review the collections and payment process and policies for suppliers and customers. These should be worked through the organisation, especially through to agreements below. Then train the team on how to implement it.
· Renegotiate agreements with key suppliers and customers. Typically, renegotiating customer and supplier agreements focusses on services and price. Payment terms and payment mechanism are frequently an after-thought. Discounts for early payment to suppliers or establishing direct debit and other arrangements with clients could make a substantial difference. Equally with suppliers, agree favourable payment terms that work with your business model.
· Divesting of poor performing assets or redundant assets. Especially for larger businesses, review the assets and even subsidiaries. What assets are underperforming and potentially can be sold now while the prices are higher and the buyers more buoyant.
· Deleverage your balance sheet. Paying off debt is the obvious way to do this. Others could include obtaining new equity investors or even converting debt to equity if private funding is involved and appropriate.
· Work closely with your finance providers or establish new relationships to obtain funding to meet your needs. Finance providers will frequently look at your Balance Sheet to assess the health of your business. Once you have convinced them that you operate on a reduced risk, there are opportunities that they will be interested in funding you for. These could include acquisition of distressed or well-priced competitors or even equipment that could give you a productivity improvement and competitive advantage. When an opportunity arises you need to be ready. The best way to do this is to work with your finance provider and include them on the journey.
About CFO Evolve. CFO Evolve provide exceptional part-time CFOs that can review and implement the strategies most suited to recession proofing your business. Contact us for a confidential conversation.
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