ACCOUNTANTS - and especially those who service SMEs - should be considering a number of issues now to help steer businesses through the economic downturn. Strategy is the key, and organisations will be looking to accountants and other financial decision-makers for leadership on matters that are critical to business success. CPA Australia has developed a shortlist of these issues and possible action that should be taken, keeping in mind the business challenges currently faced by organisations.
Financial modelling. Develop a simple spreadsheet financial model for your business around its key operating metrics - for example, revenue, costs, cash, inventory. "Plug and Play" with different scenarios to understand the potential impact of such scenarios on the viability of your business. Develop contingency plans accordingly - such a plan could include cost and inventory reduction, cash-use minimisation, sourcing additional funding and seeking a short-term revenue boosts through, for example, discounting. If you do consider discounting, your modelling may benefit from a margin and pricing sensitivity analysis, as it is critical to understand this relationship at this point in time.
Currency of your financial records: Ensure your financial records are up to date and possibly produced with greater regularity, particularly cashflow statements and forecasts. The importance of cash flow, and using reporting and forecasting to manage it, cannot be overemphasised. When business was booming, monthly reporting and forecasting of cash may have been adequate. But now, weekly or more frequent reporting may be required.
Review government responses to the downturn: The policies governments are now implementing could have an impact on your business - particularly demand for your products or services. For example, taking advantage of cash handouts to individuals and tax incentives for capital investment by business may be an opportunity for your business to run promotions that align with these government responses. You should also factor in tax incentives around business investment in your capital expenditure budget, and possibly amend your growth plans to take advantage of other government stimulus spending, such as on infrastructure. It is also time to review how your business manages its tax affairs, because it is very likely that with significant government deficits, there will be pressure to raise government revenue through tougher compliance activity.
Banks and investors: Ensure you keep them in the loop, and the sooner you talk about any problems your business may have, the more can be done. In other words, secure funding options before you need them.
Pricing: Take a more proactive view of your pricing approach and that of your competitors. You do not want to take a pricing position that means you are uncompetitive, but you have to balance this with avoiding pricing that may make your business unsustainable in the long term.
Customers: Understand holistically which product or service lines or customers are profitable, and look to remove non-profitable customers and product lines and services. Look carefully at the cost of acquiring new customers, and compare against developing current smaller customers with growth potential.
Suppliers: Look for improvements in price and terms - for example, extended payment terms, reviewing pricing, increased scope, consignment stock and simple rationalisation of suppliers.
Business improvement: Look at the divisions, products and services provided by your business. Do you need to rationalise? What is generating the profits? Where is the growth? What do you need to add to meet changing market needs now and in the recovery? Ensure operational risk management is adequate to reduce the risk of productivity losses from poor practices, losses from fraud and losses from unethical to overly risky behaviour by staff.
Opportunity: Look for potential merger and acquisition (M&A) targets. If your business is strong, the current time is an opportunity to become even stronger.
Capital investment: Now may be the time to invest if the business fundamentals are strong but turnover has slowed. Investment at the current time may cost less, and the disruption and diversion of effort may be more tolerable to your business.
Deemed director: With many businesses under considerable financial pressure, businesses may turn to their CFOs or external accountants to lead them out of trouble. Where the CFO or external accountant gains effective control, directly or indirectly, over the affairs and direction of a company - that is, they are the controlling mind of the company, and they exercise such control - they can be deemed to be a director of that company, even though they have not been validly appointed as such. They therefore become subject to the same obligations as a validly appointed director. In Australia, for instance, this could mean being personally liable for insolvent trading and pay-as-you-go instalments not remitted to the taxation authorities.
Watch out for your staff: The global financial crisis will be affecting your people. Keep a lookout for signs of stress as the downturn affects their families and their personal anxiety levels - and be ready to provide support.
This article was contributed by CPA Australia for SME INC
