Practical pointers to survive credit crunch

Jun 20 2008 By Greig Cameron

Guide for businesses on turning current tough trading conditions into an advantage

Discipline must take priority over growth, according to a new report into the credit crunch.

The research, a Practical Guide to the Credit Crunch, was compiled by chartered accountancy firm Grant Thornton and believes the outlook for business remains subdued.

Now Robert Hannah, entrepreneurial advisory partner at Grant Thornton in Scotland, has compiled a guide for businesses to improve their position and even turn tough conditions to an advantage.

He said: "As the prospect of a recession becomes a reality for many businesses, management teams often forget to do the basics when the focus is on growth, but that emphasis must now change.

"The coming months should be about instilling the right discipline in the business in order to forge ahead in times of uncertainty."

Cashisking

The old adage stands - turnover is vanity, profit is sanity and cash is reality. Management needs to be relentless in its businesses' ability to conserve and control cash.

During difficult periods, undertake a critical analysis of the business. Establish the short-term cash requirements and then forecast longer-term cash flows based on credible and realistic financial information. To generate cash more quickly, negotiate credit terms with suppliers that are as long as possible, and negotiate terms with your customers that are as short as possible.

Treat your bank as a partner in the business

Banks are facing a tough time too and will be more cautious and concerned with bad debt than they have in the past. Keep your banker fully informed of the decisions being made and give as much notice as possible if help is required.

Implement tighter cost control

There is a natural tendency to look at costs from a top-down approach, but a bottom-up approach may be best.

Employ zero-based budgeting to review all costs very carefully in terms of their value to the business and consider the costs that are actually needed to run the business.

Re-visit your strategy

When market conditions change rapidly you cannot assume your existing product and market strategy will continue to be successful. Combine available market research with existing financial information on year-on-year performance and comparisons with budget. Determine which product lines, sectors and customers are likely to put pressure on your profitability, and which present the better tactical opportunities in the short-term.

Tax

Tax, in its various forms, is usually one of the biggest overheads in the business but don't fall behind on payments as penalties can be as much as 100 per cent of the under-paid tax. Look to manage taxable profit as a way of controlling cash outflow.

Sanity check new investment plans

Investing in new assets in a downturn can drain a business of cash when it is needed most.

If it is not business critical, consider deferring it. For a business-critical asset, negotiate hard to acquire on favourable terms. But do not use all the cash - try to borrow.

Keep an eye out for bargains

The mid-market is still fuelling activity with an increasing number of private firms with access to funding seeing huge opportunities for expansion.

Be alert to opportunities where business valuations are dropping and where business owners are looking for quick exits rather than trading through a more difficult economic period.

Align performance and rewards

You need to make sure staff understand and are rewarded for achieving those objectives.

Think carefully about the behaviours you want to encourage. If you have a bonus culture and the cash simply isn't there to make bonus payments, you have to be transparent and communicate effectively to explain the position.

Right-size

Cutting staff numbers is never an easy thing to do, and it is important to do it as objectively as possible.

Carefully consider the skills, commitment and capability you will need. Lock in your key talent using incentives and personal development plans. Do not throw away talent unnecessarily, as this may prove to be a false economy when you consider the costs of recruitment and the loss of productivity and expertise.

Protect your personal wealth

You need to have a clear view of how you separate your personal wealth from the business finances . If you have made good profits over recent years, consider taking it out and putting it in your own personal account.