Surviving the Credit Crunch

As somebody who works with an array of companies I’m not going to dispute that the economic environment has taken a swerve toward tighter and more restrictive conditions. Plenty of indicators make the case for a significant slowing in economic growth. And as we have seen the credit crunch begets the psychological crunch, which can be even worse.

But I also believe that these changes simply highlight the necessity to have the best information and advisors to support business operations.
Here are some important things to think about when considering the credit crunch and your business.

The cost of funding, and the high exchange rate, continue to restrict many funding applications, driving as they do the marginal or low return propositions clean out of the market, which results in lower business activity.

Looking at the positive, however, it’s also true to say that businesses that do use the best advisors and information will be better prepared to deal with the more constrained conditions. I often work with clients to plan and project their businesses, with regular reviews to reassess strategies for improving their business through all conditions. That’s not to guarantee those businesses will not come up against prickly circumstances, but at least they will see the issues coming a lot sooner and have greater skills to deal with them.

But if this kind of positive approach is going to bear fruit, it’s vital to have a clear, detailed strategic plan. This generally covers the next five years and provides the foundation for the tactical annual plan and the key performance indicators, or KPIs, which drive a business’s success. (The determination of the correct KPIs here will involve the business owner and advisor distilling the strategic plan down to operational targets.) Not all these indicators are financial, but they are measurable, which in turn gives a business solid data to indicate whether they are achieving the plan or allows the best decisions to be made when they need to be made - not weeks or months after performance started to deteriorate.

Here, cash flow is critical to the survival of any business, and in the current economic environment this is an area that consumes more and more management time. This should always be planned, including detailed projections so one is able to identify cash shortfalls as far in advance as possible.

The methods used to complete the projections can be pretty simple. Here’s one example: It is easy enough to take the past cash activity and enter it into a spreadsheet - you can take an extract from your online banking straight to Excel to avoid re-keying. Then sort the transactions into the main types: sales, payroll, rent, tax, and so on. Very quickly you will see patterns of major costs in your business emerge. Then you can project forward and start cash flow planning.

Strategic planning and cash flow forecasting are just two areas that proactive and successful businesses tend to use to stay on top - they are better prepared to deal with events like the current trading environment, and may even turn it to their advantage. Indeed, with the right support and expertise they could even come to view the dreaded credit crunch as a blessing in disguise - and this ‘winter of discontent’ as a summer of opportunity.

By Debbie Haddon
Chartered accountant, Open side
Visit: www.openside.co.nz